The Conservative Party has never seen its poll lead collapse so far in such a small span of time ahead of an election, from a lead of 20 percentage points or more, to a lead of only 2 percentage points last Thursday, delivering a hung parliament. The cliché goes: oppositions do not win elections; governments lose them. This government did not lose, but it came extremely close, from an extremely comfortable starting position. That has to rank as a fail on the part of the Conservative campaign.
Despite the uncertainty generated by last Thursday’s result, both in terms of the UK’s Brexit strategy and the future of Theresa May as Prime Minister, financial markets have taken it in their stride. At the time of writing, sterling has fallen just a fraction of that seen last year — when the nation voted to leave the EU. But with the outlook for the UK economy unquestionably dire, and the election result merely adding to the UK’s woes, we believe that sterling is vulnerable to a further sell-off.
The defensive line from Conservative HQ is that their share of the vote increased relative to the last election, albeit by less than did Labour’s share, and that it is higher than in any election since 1983. Indeed, both parties benefited from the collapse in the vote for the single-issue party UKIP (who have had their way with the result of the EU referendum and are now redundant) and the big reduction in support for the SNP, which was so strong last time around that the only way for them was down.
UKIP and the SNP were expected to suffer, and they did. But the centrist party, the Liberal Democrats, were expected to benefit, and they did not – gaining only four seats, and seeing their share of the popular vote fall compared to their disastrous campaign of 2015. They campaigned hard on the issue of Brexit, calling for a second referendum, in the hope of enlisting the support of disappointed remainers. That support was not forthcoming. This election was a fail not just for the Tories but also for the Liberal Democrats, a party overloaded with bad feeling after their role in the Coalition.
As our regular readers will be aware, we were of the opinion that the outlook for the UK was dire even before last June’s decision to leave the European Union. The election result does not change that. The UK has accumulated a huge overload of public and private debt, which is undermining growth and driving rising inequality in terms of wealth. Whoever is in charge of managing the economy henceforth faces a long-term outlook that is unprecedentedly bleak.
That has not changed materially as a result of the election, nor has the likely shape of Brexit (only a big Liberal Democrat resurgence, with that party holding the balance of power, would have done that). It does not change the likely stance of macroeconomic policy materially either – only a Labour or Labour/SNP government would have done that. It has, however, weakened the Prime Minister’s hand in negotiations with the EU, and indeed in terms of achieving anything at all domestically. Another election is likely in due course, perhaps after a couple of by-elections.
The net effect of all this is increased uncertainty. At the time of writing, we expect a Conservative/Democratic Unionist Party-led government, which will secure a tiny majority — rendering both the period and magnitude of EU-related uncertainty even greater. All of this will weigh on an already troubled economy. And the clock is ticking. Brexit negotiations are due to begin in earnest, and the UK finds itself with a lame duck Prime Minister lacking a clear mandate of any sort.
The big question for economic policy in the longer term is how to deal with the overload of debt. Any attempt to answer that question has now been delayed even further. The UK economy will stumble on, weighed down by debt, saddled with uncertainty, until the next election at least.
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