The result of the UK general election raises a number of questions for UK economic prospects and the position of the UK’s automotive sector. Dave Leggett offers some thoughts.

The first thing to say is that the election result is certainly not what the incumbent government calculated it would get when it announced plans for the general election in April. It was a gamble that hasn’t paid off. The publicly presented rationale was to seek a bigger majority for the governing Conservative Party in the House of Commons to bolster the UK’s Brexit negotiating position with the EU. The slim majority that resulted from the 2015 election, political analysts said, emboldened dissenters or potential dissenters (whether from the left- or right-wing of the party) within the Conservative Party’s ranks of MPs. That, it was argued, could undermine the government’s efforts at every turn in its hugely complex negotiations in Brussels. A bigger majority for the governing party would give dissenters less numerical leverage and leave the UK government with a stronger hand (and, perhaps, make it easier for London to offer concessions in order to secure a free trade deal). The opinion polls two months ago suggested it was almost a one-way bet to secure a bigger majority for the Conservatives. Opinion polls, as we know, can be wrong – but it was an opportunity that Mrs May could not resist.

Something that wasn’t spoken about publicly was the electoral cycle and the Brexit timescale. Getting an election out of the way now means – under the five-year rule – that another one isn’t due until 2022. Otherwise, one would have had to happen in 2020. As things stand, the UK leaves the EU in the spring of 2019 and that’s a hard deadline. If things go badly with the terms of departure, the consequences could be very adverse for the UK economy. The EU is the UK’s largest trade partner, so anything that adds significant cost to shipments of goods and services between the EU and UK (tariffs and/or non-tariff costs due to being outside of the customs union) will reduce trade, have a negative impact on UK GDP and, ultimately, overseas investment into the UK. Economists disagree on the size of the impact but they are generally agreed that the impact of moving outside of the single market will be a negative one, at least in the short-term. The economically beneficial free trade deals yet to be negotiated around the world are a much longer-term play. So, the cynic might say, better to get that negative impact out of the way early in the electoral cycle so that there is the opportunity to get the economy right by the time of the next election – and a long runway to 2022 might be preferable to a shorter one to 2020. An industrialised economy, let’s remember, is about as agile as an oil tanker when it comes to restoring business and consumer confidence after a recession (UK productivity per head is still lower than it was in 2007).

Another consideration is the ‘transitional’ arrangements that the UK government will likely be seeking upon EU exit in 2019. No-one wants the instability that could come with a big step-change on UK-EU trade rules. A more pragmatic approach might be to continue elements of ‘business as usual’ for a period of time – particularly if the all-important ‘free trade deal’ is proving elusive to negotiate or hitting political obstacles (there are 27 countries that need to agree, what could go wrong?). Again, the UK position might be strengthened at a sensitive time if the government is not facing an election in 2020, but rather has a few years of wiggle room to 2022.

But it’s a ‘hung parliament’, which heightens Brexit uncertainties

In the UK’s House of Commons, 326 seats are required to have a majority of the 650 total. Theresa May’s Conservative Party had 331 seats after the 2015 general election when David Cameron formed a government. At the time of writing, the Conservative Party is heading for a total of 318 seats – which means it cannot govern without the support of some non-Conservative MPs or parties. It’s a so-called ‘hung parliament’. The most likely outcome is that the Conservatives will continue to govern (a ‘minority government’) with the help of a smaller party – such as the democratic unionists – DUP – in Northern Ireland (which may also be a factor in a softer Brexit stance, because the DUP does not want a hard border with Ireland). However, a hung parliament creates conditions of considerable instability in the government. It’s an outcome that may embolden dissenters in the Conservative Party, its leadership weakened by the election result.

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Will that lead to a move towards a harder or softer Brexit? That is very difficult to gauge at this point (and what we get ultimately depends also on how the EU sees things, of course – though you would hardly know that in some of the UK media coverage). Much will depend on the mood over the coming weeks – of the country and MPs. Theresa May, assuming she remains as Prime Minister (which looks likely) could use the result as a justification for a shift in approach towards a more conciliatory tone in the Brexit negotiations with Brussels that are about to start. She wanted a big majority to push through her apparently uncompromising stance. She didn’t get it. So-called ‘remainers’ may feel that the threat of siding with the opposition – the bulk of which is on the side of a soft Brexit – on now tighter numbers in the House of Commons gives them more influence now.

Politicians in Brussels probably would have preferred an outcome that offered more political stability in Britain.

If another election looks likely within the next six months, considerable uncertainty lay ahead. Politicians in Brussels probably would have preferred an outcome that offered more political stability in Britain. As it is, they now may wonder who will be in charge in six months’ time and where UK priorities will lie by then. All this at a time when the eurozone’s economy is starting to look a little more robust. Tails may well be up in Brussels, the UK’s political difficulties presented as a consequence of last June’s EU referendum result. Uncertainties have certainly been ramped up ahead of the negotiations and it doesn’t augur well for rapid progress. The EU may even seek to gently exploit UK divisions, at least in the short-term, to further solidify the EU position ahead of elections in Germany later this year and put pressure on Britain over EU Budget payments.

As far as the auto industry’s lobbying goes, expect it to go into overdrive over the coming months.

As far as the auto industry’s lobbying goes, expect it to go into overdrive over the coming months. One interpretation of the drivers behind the election result is that voters were not enthused by the idea of a ‘hard Brexit’. They may become even less so in the coming months, particularly if the slowdown to the UK economy becomes more marked and unemployment starts to rise. The opportunity is there to really go to work on sympathetic MPs in areas with major manufacturing activity, as well as on government ministers who are responsible for negotiating with Brussels.

Economic impacts unclear – but uncertainty looms large and it’s not a positive

Investors and the markets don’t like political uncertainty and this election result has delivered exactly that. This morning, the impact on share prices seems somewhat muted – although the pound is falling. The markets appear to be largely on hold and waiting to see how the immediate political landscape starts to unfold, where the pinch points are for the economic outlook. Expect a degree of volatility over the coming days. If a governing coalition emerges, led by the Conservatives, and able to demonstrate some degree of stability, that will be good news for the markets. If it sounds like it may now lean towards a softer Brexit, even better. However, if it looks like the government is lurching on its positions with plenty of dissent among the ranks of Conservative MPs, that points towards the likelihood of another election in the not-too-distant future. And that presents yet more unhelpful uncertainty. The prospect of a Labour government  – which would increase public spending and increase corporation taxes – would likely worry the markets. These uncertainties alone could cause investment to slow over the next six months and take UK economic growth down further. And consumers may well hold off on big ticket purchases such as cars.

Car buyers may well hold off even more now.

Mrs May’s rapid U-turn during the election over a so-called ‘dementia tax’ (that would have raided ballooned house price assets to fund rising social care costs), perhaps illustrates how sensitive government policy may be to public opinion in the coming months. Economic policy debates will be more fluid than usual against the background of a slowing economy.

Even before the election, the economic picture for Britain was deteriorating. In 2016 the UK economy belied the Brexit referendum predictions and grew at the fastest pace in the G7. In the first quarter of this year it was the slowest. While UK unemployment is low, the depreciation of the pound has caused an uptick in inflation. Real household incomes are falling, house prices are starting to slump. The UK car market – after a period of unprecedented growth – was facing a cyclical downturn anyway. Car buyers may well hold off even more now. Besides the economic uncertainty, the government’s attitude to taxing the motorist and the environmental impact of automobiles (diesel scrappage or not?) are thrown into question in a political climate of such uncertainty.

But let’s get some things in perspective. Big sunk investments in car plants don’t get reversed overnight. Car companies with manufacturing plants in Britain still have every reason to invest here, even if they are more anxious than they let on about tariffs and other bumped up trade costs (plenty more variables in the competitive mix though). The big question – how will Brexit actually look? – is no nearer to being answered today than it was yesterday. The UK’s negotiating platform, though, looks a little less robust, confidence damaged. It will take some rebuilding. 

The UK electorate has not played ball, again. Mrs May took a big political gamble and it hasn’t paid off. She won the election and stays on as prime minister, but the feeling is that she badly miscalculated and, in effect, lost it. There’s a lot to digest. The mood of the country is going to take a little time to understand.