Boris Johnson takes off, strategists bet on major changes to UK economy

LONDON – British Prime Minister Boris Johnson’s successor will likely eventually bring more fiscal support and less fractious relations with the European Union, according to economists.

Johnson has officially resigned as leader from the Conservative Party on Thursday, but said he would remain in Downing Street until a successor is chosen – despite many calling for him. Step aside immediately And let the “admin” less controversial To take charge in the meantime.

It is unclear exactly when a new leader will be appointed, but reports suggest the goal is to confirm a new leader ahead of the Conservative Party conference in October. By Monday morning, 11 candidates were in the race to replace Johnson with the nominees Rishi Sunak, Benny Mordaunt and Liz Truss, according to the UK bookmakers.

The overthrow of the prime minister coincides with a precarious period for the British economy. New inflation hit 40-year high of 9.1% In May, rising food and energy costs exacerbated the country’s cost-of-living crisis.

Meanwhile the economy Unexpectedly shrunk in April To mark the first consecutive GDP contraction since the start of the Covid-19 pandemic – and the UK is widely likely to experience a technical recession in the second half of the year.

The Office for Budget Responsibility, the UK’s independent financial body, has forecast that real disposable income will fall by 2.2% in this financial year (2022/2023), the largest annual decline since records began, as the pressure on household purchasing power continues.

Boris Glass, a senior official said: “In addition, uncertainty about the duration and outcome of the conflict in Ukraine is likely to negatively impact investments, as well as export performance through secondary effects on growth prospects in the European Union, the UK’s main trading partner. “. British economist at S&P Global Ratings.

“Given the aforementioned inflation pressure, Bank of England(BoE) tightening of monetary policy, and no end in sight to the conflict between Russia and Ukraine, we expect growth of 1% for the UK for 2023, the lowest rate among the G7 countries. “

Financial support

Former Finance Minister Rishi Sunak, his resignation It was one of two that led to the eventual end of Johnson’s term in office, and has announced a series of measures over the past six months in an effort to combat the cost of living crisis, including Unexpected gains tax on major oil and gas companies A one-time payment to 8 million low-income families.

However, economists widely expect any candidate to take the lead from Johnson to increase financial support for the faltering economy.

Modupe Adegbembo, G-7 Economist at axa The Investment Department said the key question was whether Johnson would use his “caretaker” period as prime minister – if given one – to drive short-term fiscal policies.

“However, when a new prime minister is appointed, we see an increased potential for additional fiscal spending and/or tax cuts,” Adegbimbo said in a note on Thursday.

“Some candidates may raise the possibility of accelerating the income tax cuts in 2024, although it remains a challenge in light of fiscal developments.”

Her comments have been echoed by strategists in UBSwho said the change in leadership makes more financial support likely because the new prime minister “will want to prove himself”.

“Any additional support for the British economy will come at an opportune moment: the GDP growth estimate for March was -0.1% compared to February, and in April it was -0.3% versus March,” UBS CIO team Mark Haefele said in a note. Friday.

“Another increase in the energy price ceiling means there is more pressure ahead, but while our base case is that the UK will narrowly escape a recession, it is important to remember that FTSE 100 It generates only 25% of its revenue within the UK.”

As such, stocks of large British companies are not particularly sensitive to domestic economic growth, and benefit from a weaker pound; Many FTSE 100 companies make profits in dollars which consequently consolidate when the pound weakens against the dollar.

Strategic analysts at asset manager Invesco agreed, highlighting that as long as sterling remains weak, investors may have opportunities to acquire “high-quality international firms at a double discount”.

Sterling pound It rose slightly after Johnson’s resignation but lost those gains and then some on Friday as global pressures continued to weigh on the pound. The FTSE 100 remained largely immune to political turmoil, tracking gains across Europe.

UBS also noted that higher exposure to both commodity-related and ‘value’ sectors – stocks that are typically trading at a discount to their fundamentals – have supported the UK market recently and made it one of the Swiss bank’s preferred stock markets.

“The immediate outlook is likely to depend on whether Johnson is viable in the next couple of months – in which case markets risk a period of additional volatility in the summer,” AXA IM’s Adegbembo said.

“However, if Johnson is replaced by another ‘acting’, the likelihood of domestic policy making will decrease, which should reduce any anticipated volatility.”

The problem of Britain leaving the European Union

No prominent candidate has emerged for the Conservative leader position, as the field is likely to be crowded and diverse. However, even once a new prime minister moves into Downing Street, approval of any fiscal package to help consumers is not a foregone conclusion.

Invesco suggested that this uncertainty means that the British economy will continue to “wilt” in the meantime, and among the advanced economies is likely to experience a recession this year.

Besides global pressures from supply chain problems and the war in Ukraine, the UK is also dealing with the trade and economic fallout from Brexit, which the multi-asset team Invesco said is fueling the inflationary fire on food and energy bills.

“It is difficult to turn to the UK economy more constructively at the moment,” said Invesco strategists. “Not only are the economic fundamentals weak, but the deep risk of a policy error is significant.”

“Given the current pressures, we believe it has become difficult for the government to unite around a clear strategy going forward.”

Despite being elected in 2019 on a promise to “finish Brexit” and promoting a “furn-ready” exit deal with the EU, Johnson’s government has continued to argue with Brussels over the operation of the Northern Ireland Protocol, a core principle of the signed withdrawal agreement. by both parties.

S&P Global has suggested that the new government may try to repair relations with the EU with a more conciliatory approach to trade relations, but this outcome is far from guaranteed given the breadth of views within the Conservative Party.

“Judging by the early line-up of potential successors to Johnson, the balance of potential outcomes will tilt toward less strained relations with the EU,” said Prinberg Chief Economist Callum Pickering.

“Even the enthusiastic Brexit candidates (Benny Mordaunt and Liz Truss) are less populist than Johnson.”

Reason for long-term optimism?

Over time, less strained relations with the EU may also prove to be a catalyst for stronger business investment, providing a higher sustainable path for sterling towards fair value 1.40-1.45 against the dollar and 1.20-1.25 against the euro, Pickering suggested.

Looking further afield, a Conservative Party leadership election followed by snap elections during the new leader’s honeymoon phase is not out of the question in late 2022 or early 2023. Both Johnson and May took the UK to the polls shortly after becoming party leader Conservatives,” added.

Beyond immediate political volatility, Glass argued that the UK continues to benefit from “strong institutional setups and credible monetary policy”.

The Bank of England has begun raising interest rates in an effort to rein in inflation, and S&P Global believes consumer prices will gradually come under control by mid-2024.

“Moreover, despite the weak macroeconomic outlook, public finances have generally stabilized, with general government net debt expected to decline to 94% of GDP by 2025 from 96% at the end of 2021,” Glass said. .