 | Could an election end the political mess? Yes. On 12 December UK voters will head to the polls for the third time since 2015. Polling suggests that current Prime Minister Boris Johnson (Conservative) will likely win a majority. For two reasons, this outcome would be positive for the medium-term UK economic outlook: 1) it would put the UK on the path to an orderly Brexit on 31 January 2020; and 2) it would do away with the risk that Labour leader Jeremy Corbyn could ever become prime minister and damage the UK with left-wing economic policies. |
| Upgraded economic outlook: If our base case prevails, rising confidence and reduced uncertainty can underpin a rebound in domestic demand growth. We therefore raise our 2020 call for GDP growth to 1.8% from 1.3% and our 2021 call to 2.1% from 1.8%. |
| Fiscal stimulus: If re-elected, Johnson looks set to throw money at the economy through a combination of tax cuts and higher public spending. This will add to demand growth in the near term. It may elicit a positive market response – as did US President Donald Trump’s fiscal stimulus in 2017/18. However, the risks would not be worth it, in our view. A stimulus will likely raise inflationary pressures and amplify existing long-run fiscal challenges linked to rising health costs and an ageing population. A push for pro-growth reforms would be welcome, though. |
| Gradual rate hikes ahead: The Bank of England (BoE) has long signalled that it would raise rates in case of an orderly Brexit. We expect the BoE to hike rates by 25bp in Q3 2020 and again by 25bp in Q3 2021. This would take the Bank Rate to a still-low 1.25% by end-2021. The likelihood of a fiscal stimulus strengthens the case for a policy normalisation and tilts the risks to the path for rates to the upside. |
| Some uncertainty persists: An orderly Brexit on 31 January 2020 reduces uncertainty by dramatically narrowing the range of scenarios for the UK’s near-term outlook. This is a big plus. However, it does not end the uncertainty about the final shape of Brexit – ie the future UK-EU economic relationship – which could remain a modest drag on business activity. Also, the risk of a hard Brexit is not fully off the table in case the EU and the UK fail to strike a deal on their future economic relations – that leaves open the risk of a hard Brexit at the end of 2020. |
Kallum Pickering
Senior Economist
+44 20 3465 2672
kallum. pickering@ berenberg. com
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