LONDON: The election result with the Conservatives having a majority, albeit small, is being very well received by the markets and businesses will likely be pleased overall with the result, according to Howard Archer & Adrian Rogstad of HIS.
Among the key challenges for Conservatives will include threat to government stability or potential backbench rebellions and potential defections to UKIP.
Cameron’s EU membership referendum will pose considerable uncertainty in the two-year outlook and how to achieving a new political settlement for the whole of the UK will be a very tough challenge.
Unexpected majority means Conservatives will almost certainly govern alone. The Conservatives’ majority means they will be able to form a most likely stable government lasting the full five years. The main threat to government stability will be potential backbench rebellions and potential defections to UKIP, in particular over negotiations with the EU about Britain’s membership terms or promises of further devolution to Scotland, Wales and Northern Ireland.
Cameron’s EU membership referendum will pose considerable uncertainty in the two-year outlook. It is unclear what kind of deal Cameron can get from other EU states by his proposed date of 2017 that will allow him to confidently campaign to stay in the EU. The Conservatives’ proposals to potentially withdraw from the European Court of Human Rights and restrict the free movement of labour will do them no favours in seeking allies in other European countries. On balance, the referendum is most likely to result in continued EU membership, but will probably be very close.
Achieving a new political settlement for the whole of the UK will be a very tough challenge. Cameron’s promise in his victory speech to be a ‘one nation’ prime minister is a positive signal in response to the SNP’s surge in Scotland, following English-centric, piecemeal Conservative devolution proposals in the past. However, even with the best of intentions it will be very difficult for Cameron to reach any kind of devolution settlement that provides stability to the UK while balancing the interests of his own skeptical English backbenchers and UKIP with those of the SNP and other nationalist forces.
The election result with the Conservatives having a majority, albeit small, is being very well received by the markets. Sterling has made strong initial gains and the FTSE has followed suit. Gilts have also gained and should benefit from the fact that the Conservatives will likely be able to press ahead with their plans to reduce the deficit more quickly than Labour would have done.
The fact that the election has seemingly delivered a government that will survive for a full term – and crucially avoided the need for another general election later this year – is good for stability which should be supportive to economic activity. There was clear evidence in the run-up to the general election that the economic activity was being hampered by increased business caution due to the uncertainty.
Businesses will likely be pleased overall with the result given that the Conservatives are seen as more business friendly than the other parties.
However, while the markets are likely to be happy with the election result in the near-term and the economy should benefit from the more stable result than had seemed likely, major questions remain further out that have the potential to be major causes of uncertainty and instability.