| Risks increase on the eve of election day: The final polls ahead of tomorrow’s UK general election suggest that the risks to our call that Boris Johnson and the Conservative Party will win a majority have risen modestly. An updated projection by YouGov-MRP published last night showed a 28-seat majority for the Conservatives, down from 68 two weeks ago. The pollster said that, because the estimate was now within the margin of error, it could not rule out a hung parliament. In addition, while most recent polls show the Conservatives edging a little higher with a lead over Labour ranging from 8-15ppt, two recent polls by ICM Research and SavantaComRes put the party just 6ppt and 7ppt ahead respectively. We have argued that an 8ppt lead would keep the Conservatives in the safe zone for a majority. |
| Still on for a Conservative majority? Probably, yes. Despite the latest developments in the polls we stick with our base case that Johnson will win a majority. However, it looks more likely than before that the election could yield only a small majority for Johnson. The 28 seat majority predicted by YouGov would be the biggest single-party majority for a UK government since Labour won the election in 2005. However, it would not be enough to dilute the influence of the eurosceptic wing of the Conservative Party. With only a small working majority of say 10-30 seats versus 30 seats or more, the Conservative hardliners will have a bigger influence over negotiations about the future UK-EU relationship. |
| Watch the hard Brexit risk: The risk that the UK could leave the single market without any follow-up agreement would not be fully off the table even if an orderly Brexit happens on 31 January 2019. In case the EU and the UK fail to strike a deal on their future economic relations, a hard Brexit could happen at the end of 2020. Subject to a vote in parliament, the UK would have the option to lengthen the transition period – and remain in the single market – in order to give more time for the negotiations on the future relationship. But that risk would rise if Johnson wins with only a slim majority. The eurosceptics in his party would likely refuse to back a longer transition. |
| Hung parliament – what if? In case no party wins a majority, we would need to ask which parties could potentially form a coalition. Despite probably still having the most seats in a hung parliament scenario, we see no feasible coalition partner for the Conservatives. All other major parties either reject Johnson’s renegotiated Brexit deal, want a second referendum or want to stop Brexit altogether. The key question is whether the Labour Party could find a partner. The most likely candidate is the Scottish National Party (SNP). But polling suggests that together they would still fall short of a majority. That leaves two options: 1) return to the polls for another general election in early 2020; or 2) if Labour and the SNP manage to bring the pro-Remain Liberal Democrats into a coalition, we could see a second EU referendum in 2020. |
| Economic and market impact: In case of the surprise outcome of a hung-parliament, we would likely downgrade our economic outlook in the near-term. Relative to our base case, in which real GDP growth accelerates to nearly 3% annualised in mid-2020, continued political uncertainty from a hung parliament would further damage confidence. Growth would remain at its current subdued annualised pace of less than 1%. In markets, we would expect UK-focused equities to pare back recent gains with sterling down by up to 5% on a trade-weighted basis in the near term. Further market moves would depend on how the politics unfolds thereafter. |
Kallum Pickering
Senior Economist
+44 20 3465 2672
kallum. pickering@ berenberg. com
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