13th December, 2019
Boris Johnson looks set to secure a commanding majority of around 80 seats in the new Parliament. Crucially, this means he will be less reliant on the ERG group of Conservatives, circa 50 MPs. This will be important in 2020 as compromises have to be made. Most importantly, the new Prime Minister will have to face the reality that the 'transition period' will have to be extended. There simply isn't enough time to secure a trade agreement by end-2020. The inevitable U-turn would have been considerably more difficult for Johnson with only a small majority.
The Withdrawal Agreement requires the UK to apply for an extension of the 'transition period' by June 2020. Hopefully Johnson will plump for an early extension, giving households and businesses three-years of certainty that trade relations with the EU will remain unchanged during this time.
However, the Conservative's promise to 'get Brexit done' may soon come back to haunt them. EU/UK trade negotiations will start soon after the exit date. The UK 'task force' headed up by Michel Barnier will seek to conclude a negotiating mandate from the EU member states through February and March. The talks could quickly become acrimonious with the EU set to demand fishing rights in UK waters as a proviso for any trade deal early on in the negotiations. However, a large majority gives Boris Johnson more room for maneuver - possibly making a close trading relationship with the EU more likely over the long term.
It has been hard to discern any Brexit impact on the Irish economy given the buoyant out-turns in 2019; Gross Domestic Product (GDP) (+5.8%), employment (+2.4%), tax receipts (+6.7%) and export growth still in double-digit territory according to latest statistics from the Economic and Social Research Institute (ESRI). However, business, consumer confidence and purchasing managers index (PMI) surveys deteriorated in the lead up to the October 31st deadline ― subsequently rebounding in November. In light of the UK election result, negating any possibility of a 'no-deal' Brexit in January, this rebound in sentiment should continue.
The key area of the Irish economy that should benefit is the housing market. Evidence from our work with MyHome indicates that Brexit uncertainty has clearly had an impact at the top-end of the market, hurting pricing and transactions. The Bank of Ireland Economic Pulse survey already suggests housing market sentiment picked up slightly in November. Irish Small to Medium Enterprises (SMEs) lending has been disappointing, and to some extent could rebound in 2020, but like their UK counterparts, the lingering uncertainty on trade relations could still hold back investment from smaller companies.
The current consensus forecast is for UK GDP growth of just 1.0% in 2020 (source: Bloomberg), given output appears to have flatlined in Q4, or it could even contract. Annual GDP growth was just 0.7% in October (Source: Office for National Statistics (ONS)) ― the slowest pace in seven years ― weighed down by declining output in construction and manufacturing, with the services sector holding up activity. In the short term, there will be some Brexit boost. Consumer and business confidence are likely to rebound, helping retail spending. The PMI surveys may well pick-up, back above the 50 no-change level, particularly for the services sector. However, UK manufacturing is being held back by the global/European cycle.
However, a sharp rebound in business investment is unlikely. UK businesses will possibly still be faced with uncertainty on the UK's future trade relations with the EU and, for now, the prospect of a fresh 'cliff-edge' in January 2021. An early extension could help diminish the uncertainty ― but amidst talk of a 'Canada dry' trade deal and acrimonious EU/UK negotiations ― large UK companies are still likely to hold off on large capital projects. Hence, productivity is likely to remain weak, restricting an upside for UK GDP growth.
A key hope has been that the Conservatives will enact ambitious capital spending plans. A new budget could take place early in 2020. The UK is already running a deficit of 2% of GDP and the Tories have signaled that they are only willing to go to 3%. Updated Office for Budget Responsibility Projections could squeeze the fiscal space further. Most importantly, Johnson (following David Cameron's example) may well decide to keep his powder dry, saving any room for fiscal stimulus until late on in the life of the next Parliament, in time for the next election in the mid-2020s.
By Irina Bevza, and Stephen Grissing,
Sterling and UK equities have been depressed by political risks since the vote to leave the EU in June 2016. As mentioned above, conservatives’ victory translated into a “Brexit boost” for sterling and UK and Irish stocks, but uncertainty with regards to UK's future trade relations with the EU and UK business investment sentiment is likely to remain an overhang. UK equities rallied led by FTSE 250, domestic mid and smallcaps, which recorded 2.7% at the time of writing (13th December), followed by FTSE 100 and ISEQ which were up 2.4% and 1.4%, respectively.
Sterling breached consensus projections recording 83p at midday on Friday versus forecast 85p for Q1 2020, the highest level against euro since May 2017. Compared to USD, sterling rallied to 75p per dollar overshooting consensus expectations of 76p for 1Q 2020, which is the highest level since December 2016. British government bond yields also picked up as investors pulled some of money out of safe havens.
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