Has Johnson’s luck finally run out?

Rebel Conservative MPs have mustered enough votes to trigger a no confidence vote in UK Prime Minister (PM) Boris Johnson. At least 15% of 359 Conservative MPs must have submitted no confidence letters to the party’s chair. In a secret ballet due for 18:00-20:00h BST tonight, Johnson will need the backing of more than half of his MPs (180) to stay on as Conservative leader and PM. Winning the vote would keep him in the job for at least 12 months before MPs could possibly stage another challenge. If he loses, the Conservative Party will need to find a new leader – who will in turn become the new UK PM. If Johnson is unseated, it could have far reaching implications for UK fiscal policy as well as foreign and trade policy.

Has Johnson got the numbers?

That is hard to say. Whether Johnson stays or goes will be decided on one factor – what outcome the Conservatives believe gives them the best chance at the next election, scheduled to be held no later than 24 January 2025. On the one hand, the case against Johnson is clear cut. Following escalating scandals and a souring economy, Johnson’s Conservatives are sliding badly in the polls. Based on the last four surveys by major pollsters, the Conservatives are 8pts behind Labour with 33% and 41%, respectively. Rebel MPs have probably concluded that a different leader now gives the Conservatives a better chance of remaining in power or at least losing less badly when the election comes around. On the other hand, Johnson is a proven election winner – this counts for a lot. In the December snap 2019 election Johnson won the biggest Conservative majority since 1987. Remember, the distribution of votes in the UK’s first past the post system can matter as a much as the number of votes. Conservative MPs will thus recall how Johnson won a landslide in December 2019 (365 seats out of 650) with only 330k more votes than his predecessor Theresa May. May won 317 seats in June 2017 and had to preside over a hung parliament. However, May won 2.3 million more votes that her predecessor David Cameron had won in 2015 – even though he secured a narrow majority with 330 seats (not including the speaker).

What if Johnson wins?

It is not inconceivable that Johnson himself has orchestrated the no confidence vote by asking his allies to submit letters on no confidence. With Johnson’s star fading badly, he may have concluded that his window of opportunity to force the vote (which he believes he can still win) and secure his safety for a while would otherwise be closing soon. The national feel-good factor after the Queens 70-year jubilee may also play a role in his calculus. While possibly encouraging some supporters to trigger a vote now is a risky move, waiting for longer may have added to the risk that disgruntled Conservative MPs would eventually oust him. If Johnson wins, UK economic as well as foreign and trade policy would remain largely unchanged. On the economy, Johnson would. continue to preside over a low wattage mostly-centrist agenda involving rising government spending (largely matched by rising taxes) as a percent of GDP, piecemeal efforts to ease regulations and ‘big-talk-small-action’ public investment. On foreign policy, he would continue to push a hard line against Russia while trying to foster better relations with Washington – which under President Biden remains suspicious of Johnson following his persistent threats to tear up the Northern Ireland protocol of the Brexit treaty. On trade matters, Johnson would continue to seek new deals and expand existing ones. However, this would not compensate for the continued noisy relations with the UK’s most important partner, the EU. Altogether, this would make for continued middling economic performance for the UK among major advanced economies. Sterling and some other UK risk assets would remain undervalued relative to fundamentals due to the continued risk that UK-EU tensions could boil over and trigger a trade war that would disproportionally hurt the smaller UK.

What if Johnson loses?

If Johnson fails to win a majority, attention will turn to his replacement. While the uncertainty of who could run the country may temporarily hurt market sentiment, the economy and markets would likely benefit if the UK is no longer lead by an unpredictable-populist. The race would be decided according to the leadership election rules of the Conservative Party – this is not a matter for parliament. The election has two stages: first, would-be leaders among Conservative MPs put their names forward and are whittled down in a series of votes among MPs until two remain; second, the party membership decides who of the two will lead. The 1922 Committee, which is the parliamentary party of all backbench Conservative MPs, will decide the timeline of key votes. The process need not end with a final vote by all party members. In 2016, Theresa May became leader after only two rounds of votes in the first stage. After wining 60% support of MPs, the other candidates dropped out of the race. The process in 2016 lasted less than two weeks - from 29 June to 11 July. In 2019 when Johnson won in the second stage, after five-ballets in stage one, the process took some seven weeks – from 7 June to 23 July.

Who are the favourites to replace Johnson?

Although the odds and probabilities usually change fast in the first few days of any such race, bookmakers currently put the top five candidates to replace Johnson as follows: Jeremy Hunt (pro-EU, ran against Johnson in 2019, held various cabinet positions); Liz Truss (Remainer turned Brexiteer, current Secretary of State for Foreign, Commonwealth and Development Affairs); Tom Tugendhat (pro-EU, Chairman of the Foreign Affairs Committee); Penny Mordaunt (Brexiteer, Minister of State for Trade Policy); and Ben Wallace (Remainer, Secretary of State for Defence). In the event that Johnson is ousted, we will publish a detailed overview of his potential successors. But judging by the early line-up, the balance of potential outcomes would tilt towards less strained relations with the EU. Even the ardent Brexiteer candidates (Mordaunt and Truss) are less of the populist variety than Johnson. This suggests that, while it is unclear whether UK-EU relations would improve a bit or a lot, the overall situation stands to be much calmer. Over time, less fraught and uncertain UK-EU relations may prove to be the catalyst for stronger business investment and a sustained appreciation in sterling towards fair-value against the dollar (c1.40-1.45) and the euro (1.20-1.25). Looking further out, a Conservative leadership election followed by a snap election during the new leader’s honeymoon phase is not unthinkable for late-2022. Both Johnson and May took the UK to the polls soon after becoming Conservative leader. Watch this space.

Kallum Pickering
Senior Economist, Director

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