UK: Election Day approaching - Rabobank

Stefan Koopman, Market Economist at Rabobank, explains that in the days that followed the announcement of snap elections, the Tories extended their already impressive lead in the polls but, recent data show that their margin over Labour has narrowed significantly.

Key Quotes

“There are even a number of polls that give the Tories just a one point lead over Labour, suggesting the race for 10 Downing Street is wide, wide open. However, if we take a seven-day median of all latest national polls, the margin looks wide enough to assume that we’re heading towards a victory for the Conservatives, although it probably won’t be as large as Theresa May had hoped for when she decided to push for snap elections. The data from Oddschecker appear to confirm this as it derives an implied probability of a Tory win of 91.68%.”

“A more realistic risk is that the Tories will lose their absolute majority. This would imply a hung parliament, spell disaster for May and show that her gamble has misfired. An analysis by YouGov predicted exactly this, when it suggested that the Conservatives could fall 16 seats short. Their prediction model is based on 50,000 interviews and the pollsters assessed the voting intentions of every type of voter, including age, social background and how they voted in the referendum. They then combined this with historical election data and census data from the ONS to come up with their estimates. It’s quite an unorthodox way of polling – and it’s possible that they’re completely wrong – but it shows that May took a lot of risk.”

“Should the Conservatives indeed lose their absolute majority in Parliament tomorrow, uncertainty about Brexit negotiations and the eventual outcome will increase. The Brexit process could become increasingly complicated if neither the Conservative Party nor Labour wins a majority. The UK will then end up with a hung or minority parliament. The UK’s stance towards Brexit could become softer if the Tories are forced to cooperate with more pro-EU parties, or if these parties are able to form a coalition themselves (which was once dubbed the “coalition of chaos!”).”

“A soft Brexit would naturally be positive for economic growth in the UK, but the lack of a majority in the House of Commons will raise the risks of a ‘cliff-edge’ Brexit as it will be much harder to pass Brexit-related legislation. Furthermore, a new government will probably want to revise the current stance on Brexit which is mainly written by Theresa May. This will take time and could further delay the Brexit negotiations, while the two-year clock already started ticking.”

“While it is difficult to squeeze the current complexities of UK politics into a binary universe, the behaviour of the pound this year suggest that a relief rally would likely follow a strong victory for May tomorrow, while it could fall on any other outcome. Regardless of the election outcome, we continue to expect that Brexit related uncertainty will weigh on the pound again in the coming months. Given that the Brexit negotiations are due to start on June 19 and that these are likely to be tough, we expect EUR/GBP to edge towards the 0.89/0.90 area by year end.”