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Michael Baxter

May Day, May Day: UK PM creates certainty by introducing uncertainty

Written by: Michael Baxter on April 19th 2017

Category: Thought for the day

The markets were sanguine, The FTSE 100 fell sharply, but largely for technical reasons. But there might be too much complacency.

big ben

Hitchcock thriller or particularly disappointing episode of Dallas

Alfred Hitchcock once said that a good film needs to start with an earthquake, and then the tensions rises. Donald Tusk, President of the European Council was not slow to get involved in UK election fever yesterday, when he tweeted “It was Hitchcock who directed Brexit: first an earthquake and the tension rises.” His tweet instigated no shortage of puzzlement and a fair degree of criticism.  Some even accused him of belittling the whole thing – maybe it would be more accurate to characterise his tweet as a joke that went flat.

And yet in an odd way, Theresa May’s decision to call an election for June 8th was quite the opposite of rising tension.  If the EU referendum was an earthquake, then the tension most certainly increased with the US election, but it may well turn out that the UK general election 2017 was akin to the mildest of after-shocks, about 0.5 on the Richter scale, the equivalent perhaps of an earthquake that causes a very slight ripple on Lake Windermere.

Creating certainty

We live in an uncertain world and Brexit, Article 50 etcetera, were creating more uncertainty. Mrs May’s decision to call an election will probably create less uncertainty. It probably won’t do her political career any harm either. Whether you agree or disagree with the move depends entirely on your own politics. If you are a labour supporter you probably feel most uncertain about your party’s prospects, if you are a strong supporter of Leave, you will no doubt be celebrating the likely strengthening in Mrs May electoral mandate, and if you are a strong Remain supporter, you may see a glimmer of hope that the UK will do some kind an about turn relating to Brexit.

Opinion polls get things wrong, but not normally to a degree that provides any credible reason to doubt the result of the June election. It will almost certainly see a Tory landslide and nothing like the kind of landslide that is created by an earthquake.

The markets like landslide victories, because the markets like certainty. If anything, the fate of the Theresa May regime, and its stance over Brexit has become more certain.

Oddly, though, some analysts celebrated for a subtly different reason.  They suggested that that the margin of the Tory victory in June will be such that Mrs May will no longer need to pander to the hardcore anti-EU wing of the Tory party, and will thus be free to negotiate a softer form of Brexit.

If nothing else, it goes to show how you can interpret anything to fit in with your own view of the world.

Too much complacency

It is possible, however, that the markets and opinion polls have got this one wrong, it depends on what happens next.

There are many people in the UK, Tory and Labour alike and most certainly Lib Dems, who feel vehemently pro-EU and hate Brexit and all it stands for.  If these people were to, in some way unite, not by forming a political party, there is not enough time for that, but agree to cooperate, and in the case of rebel Tory and Labour MPs go independent, then that may lead to something less predictable. Not enough to win an election for an anti-Brexit coalition, but enough to create a hung parliament. If this happens, then there will be more uncertainty.

It is possible that the media, opinion polls and the markets are underestimating the strength of feeling on this topic.

The markets

The markets are assuming, however, that the consensus will be proven right. Frankly it probably will, and Mrs May will indeed win a commanding majority.

Based on that view, the pound surged yesterday, up two and half cents against the dollar, and by one and half cents against the euro.

As I write, there are 1.1970 euros to the pound.  At this level, the fall in sterling from the pre-Brexit level is really not that significant.  The inflation threat from Brexit has waned, but so has the potential terms of trade advantage that Brexit was supposed to bring.  It is important to be consistent about this.  Post EU referendum, Brexit supporters said the fall in sterling was good news as it would boost exporters, the Remain camp said that the fall in sterling would hit households’ real disposable income.  Right now, those arguments, on both sides, are no longer valid.

The FTSE 100 lost 180 points, but don’t read too much into that. For one thing, it was falling anyway, before Mrs May made her announcement, and for another thing, a fall in the index is an inevitable consequence of a rise in sterling, as many constituents of the index enjoy a large portion of their earnings abroad, while their share price is valued in sterling.

There was one development with the markets that few seem to notice, but I reckon may prove to be pretty significant. The yield on UK ten year bonds fell to just 1.01 per cent, the lowest level since Last October. The markets seem to be saying that the odds of a hike in UK interest rates any time soon are receding fast.

The economy stupid

But maybe there was another reason behind Mrs May’s decision.  It is ‘the economy stupid,’ as James Carville, campaign strategist for Bill Clinton, once said.

Right now, the UK economy, and indeed the global economy is the strongest it has been for years. It has nothing to do with Brexit, the forces at play have more to do with the turning of the economic cycle, and are global in nature.  The UK is enjoying an especially strong recovery, compared to similar economies, because it had a particularly bad downturn. The IMF has revised its projections for UK growth this year, upwards to two per cent, a few months ago, it was forecasting 1.1 per cent growth.

If things had carried on as before, the election would have been called in 2020, the UK would have left the EU, and right now, the economic prospects for that year are uncertain at best.

Assuming she wins, Mrs May will extend her period in office to 2022 – probably, this may give the economy time to recover from any Brexit related downturn – although frankly forecasting that far ahead is difficult and Mrs May’s bet may yet backfire.

Personally, I am not 100 per cent certain all this is really happening, any moment I am expecting David Cameron to step out of the shower, and we find it has all been a dream.  And that the earthquake never happened in the first place.

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Tags: UK election, Theresa May, general election, UK government

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