Sunday, December 08, 2019
The election's nearly over, but uncertainty will remain
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

The first rule of forecasting is that the closer is an event, the more cautious you should be about predicting the outcome. That will not stop a wave of such predictions in the coming days, and it has not stopped the financial markets from, for example, pushing the pound higher on the assumption of a Tory majority being delivered on Thursday.

I do not need to tell you that the markets, taking their lead from opinion polls as well as bookmakers’ odds, sometimes get it wrong. They did not anticipate the vote for Brexit or Donald Trump’s election victory in 2016, or that Theresa May would fall short of a majority in 2017. Human nature being what it is, people often predict the outcome that they regard as the most palatable.

Let me, however, go with the flow. The polls indeed suggest that a Tory majority is more likely than the next likeliest alternative, which is that the Conservatives are the largest party in a hung parliament.

If the first of these is the case, it will make a difference. Every business person I have spoken to in recent weeks has raised the spectre of a Labour victory. The “Corbyn shudder”, the unprompted reaction of the vast majority of them to the prospect of a Jeremy Corbyn-led Labour government, has become a recognised body language. Removing that uncertainty will provoke a massive sign of relief among businesses.

The question is what else has changed. You have to grit your teeth during election campaigns, when facts have long since ceased to be sacred. Every time a Tory talks about Britain’s strong economy, I am reminded that it has slowed to a crawl, and that the purchasing managers’ index (PMI) for November, at 49.3, was below the 50 dividing line between expansion and contraction.

The PMI was below its eurozone equivalent, which was above 50, and suggests that the pattern of the past three years, in which even the troubled eurozone has comfortably outgrown the UK, is being maintained.

There are other concerns, highlighted by official data. Britain’s external position is pretty poor. The size of the current account deficit, £109bn over the last 12 months, roughly 5% of gross domestic product, would in the past have been enough for a run on the pound.

The seeds of further balance of payments difficulties are being sown. In the past, service-sector earnings and investment income from abroad were enough to keep us afloat. That is no longer the case. Since 2016, the stock of investment abroad by British companies has been exceeded by the stock of foreign investment in the UK, as overseas buyers have snapped up commercial properties and businesses at what for them are bargain basement prices because of the pounds. Britain’s net negative investment position is now almost £112bn. That will be reflected in future in more investment income leaving the country than coming into it.

The question is where we go from here. Elections can put a spring in the economy’s step, but there is no sign of that at the moment. According to Consensus Economics, the average forecast for growth in the economy next year is just 1.1%; weaker than this year and, in fact, the weakest since the financial crisis.

Given that there is a big boost to public spending built into that, as announced by Sajid Javid in September, that is very weak indeed. The Tories would draw attention to a planned cut in National insurance in April, by raising the threshold to £9,500. At the same time, however, a planned two-point cut in corporation tax has been cancelled so, relative to previous expectations, taxes are going up rather than down.

Economists are downbeat because, while the parliamentary arithmetic has changed, other things, including the realities of Brexit, have not. That probably overstates it. A Johnson majority would put him in a stronger position than he was before the election, and a stronger one than Theresa May’s post-2017 situation.

There should be no trouble getting his withdrawal agreement, mainly the same as hers but with a concession to the EU on Northern Ireland, through parliament, permitting formal exit on January 31.

It is what comes afterwards that worries people. Though a prime minister with a majority is in a stronger negotiating position than one without one, the fundamentals and contradictions remain the same. The closer the future trade deal, the longer it will take to negotiate. And the more regulatory divergence the government wants, the harder it will be to negotiate a close deal.

Any deal that could be negotiated by the end of 2020 would be a “bare bones” deal, less comprehensive than that negotiated with more distant countries such as Canada, which is why some see the prospect as a “Canada-minus” deal. If even such an undemanding deal cannot be negotiated by the end of 2020 and the prime minister carries out his threat to leave anyway, without a deal, the Institute for Fiscal Studies says that this would be worse for the public finances than a Corbyn government. Johnson is probably bluffing but you never know.

According to Capital Economics: “While a Conservative election win followed by a Brexit deal would boost the economy, the lingering uncertainty generated by Boris Johnson’s pledge not to extend the transition period beyond 2020 will limit the rise in GDP growth>”

Clarity is not something you necessarily expect in an election campaign, and this one is worse than most. There was more trade expertise in the May government than in Johnson’s and business is getting fed up of bland reassurances and a failure to address the detail.

The Institute of Directors on Friday published the results of a survey showing that for the majority of businesses, the speed of a negotiation is less important than getting it right.

“Business needs a number of commitments from the next government to help navigate its way through choppy trade waters ahead,” said Allie Renison, the IoD’s head of Europe and trade policy. "Understanding the exact nature of how arrangements with the EU may change is critical for companies, and our data clearly shows that getting a workable deal after Brexit is more important to business leaders than simply how long it takes to get there.”

This week’s election can remove one important source of uncertainty for business and the economy, if it means there will not be a Corbyn government. Plenty of other uncertainties will, however, remain.