Boris Johnson and the Conservatives have won the United Kingdom elections. He is now the undisputed leader as his conservative party won a landslide victory of 365 seats - the biggest majority at Westminster since Margaret Thatcher's victory in 1987. Politics aside, what does this mean for the markets? Allianz SE released a special report shortly after the elections.
“The solid Conservative majority would lead to higher growth”:
The polls were right this time: In the UK elections, the Conservative Party won a solid majority of 74 seats - the party's largest since Thatcher’s election in 1987. This will allow them to “get Brexit done” in 2020, reducing the uncertainty in the UK economy. Risks of early elections are rather low in the next three years.
As a result of lower uncertainty and higher fiscal spending, we revised on the upside our 2020 growth forecast for the UK from +0.8% to +1.0% and we expect growth to continue to recover into 2021 (+1.6%).
What does this mean for companies? Stronger domestic demand would be positive in a context of slowing turnover growth. However, downside pressures on prices should prevail, given the still “above normal” levels of inventories post contingency stockpiling throughout the year. We expect business insolvencies to slow down to +3% in 2020, after +6% in 2019. In 2021, a moderate fall of -2% is likely.
What does this mean for markets? The sterling should continue to appreciate (GBP/EUR at 1.25 at end 2019) and stabilize in 2020. Domestic equity markets should benefit from the outcome. The combination of upside pressures coming both from the real and inflation Gilt components should result in a clear upside risk to the back-end of the Gilt curve. Our proprietary model currently computes the upside risk as a +10bps possible increase in 10-yr Gilt.
However, the hardest is yet to come: the trade deal with the EU is unlikely to be completed before 2022, given the challenges of implementing the border controls in the Irish sea.
You may wish to download the full report here: The solid Conservative majority would lead to higher growth
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