In the wake of Boris Johnson’s historic victory in the U.K.’s general election, J.P. Morgan Research examines the impact of the vote on the Brexit process, U.K. economy and battle lines in forthcoming trade talks.
Boris Johnson led the Conservatives to a decisive win, securing 43.6% of the national vote and 365 seats in Parliament—the best result for the party since Margaret Thatcher’s performance in 1987, and the largest parliamentary majority since Tony Blair’s win in 2001.
Given the size of Johnson’s parliamentary majority, Brexit will now happen and the government should have no trouble securing enough votes to pass Johnson's Brexit bill through parliament. The Withdrawal Agreement Bill will become law and the U.K. will leave the European Union on January 31.
It will have secured the terms of its divorce and will then negotiate the terms of its future relationship with the EU.
To that end, the U.K. will enter a transition period agreed under Johnson’s deal, scheduled to close at the end of 2020 but with the option for the U.K. to request an extension of up to two years by July 1.
Will Johnson’s new government tack towards the pragmatism of keeping options open, or give stronger expression to Brexiteer views? The Conservative manifesto stated “we will not extend the implementation period beyond December 2020” and Downing Street has now confirmed that the revised version of the Withdrawal Agreement Bill will contain a number of changes, including removing the possibility of the transition period being extended.
J.P. Morgan’s view is that Johnson is committed not just to the general idea of Brexit but to a specific form of Brexit and how it should be pursued. That view places high value on the U.K. securing full autonomy as it leaves the EU, alongside the belief that such autonomy can be secured without a large negative impact on the U.K. economy, provided it is prepared to be assertive in negotiations.
There are three main scenarios to consider for the year ahead: exiting the transition period without a trade agreement; agreeing some form of free trade agreement; or extending the transition period into 2021 to continue talks.
J.P. Morgan sees some form of “deal” as the most likely outcome (50%), putting the probability of no trade deal at 25%, still worryingly high given its macroeconomic implications, and then an extension of trade talks into 2021 at 20%.
Given the commitment Johnson is now set to enshrine in law, it looks like whatever agreement is reached will be presented as a new deal, even if it takes large parts of the transition conditions and pushes them into 2021.
The reduction in near-term political uncertainty is likely to help to lift growth from 1Q20. Although sentiment may then deteriorate as negotiations on the future relationship take hold from the spring, government measures to boost the economy should be kicking in by then helping to lift growth back to 1.5%.
The size of Johnson’s win gives him considerable power domestically, as well as the ability to push through legislation quickly. That means the indecision and domestic delays that have characterized the past two years in U.K. politics should be over. But it also means the government’s approach in the future negotiations with the EU is likely to be forceful and assertive during 2020. It is the U.K.’s interaction with Europe that will now be the main source of uncertainty and volatility.
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