Sterling has fallen on the foreign exchanges after a night of sensational election drama
- Latest: Pound inches up after Tory-DUP deal
- City sees instability after May’s election gamble backfires
- Pound plunged to $1.265 from $1.295 on Thursday
- Sterling hit seven-month low against the euro
- Introduction: Pound slides after election shock
- How the night unfolded in the City
- Election results live: Theresa May under fire
The UK economy was seeing subdued growth ahead of the election, according to think tank NIESR.
Its latest estimate of GDP showed output growing by 0.2% in the three months to the end of May, the same as during the three months ending in April. This is below its long term trend of 0.6%, it said. NIER’s James Warren said:
The subdued performance of the economy in the three months to May was driven by weakness in the production sector, offset by a mild rebound in services. The current political backdrop may lead to greater uncertainty and a drag on growth prospects, in particular business investment, which contracted in 2016.
The subdued performance in the economy throws the political turmoil of a hung Parliament into sharp relief. People are looking for answers to low levels of economic growth, limited improvements in productivity and falling real wages. That none of the parties wholly addressed our long run problems or how we ought to address exit from the European Union is the reason there was no clear winner.
Richard Watts, manager of Old Mutual’s UK Mid Cap Fund, isn’t convinced by Theresa May’s pledge to carry on as prime minister.
He argues that a hung parliament election make a ‘softer’ Brexit, or even no Brexit at all, more likely:
Rather than strengthening her position, she has been significantly weakened, perhaps fatally. It is not clear that she can hold on to her position of prime minister, although she has announced that she intends to do so. In 10 days’ time, talks are set to start with the EU over the terms of the UKs withdrawal from the EU. In our view, the election result has called in to question the government’s mandate for a hard Brexit. It also appears that the DUP favours a soft Brexit and may make this the price of doing a deal with the Conservatives. What this means for Brexit is unclear but it makes a soft Brexit, or no Brexit more likely, in our view. This may not be a bad thing for the UK economy. However, the timing of talks could be delayed as Theresa May seeks to form a government, which adds another level of complexity to the negotiations.
With a continuation of a Conservative-led government, we do not expect any major policy changes. If anything, we may see a fiscal easing. It’s obvious that Jeremy Corbyn’s anti-austerity policies have resonated very strongly with parts of the electorate. In time, this could be good for UK domestic cyclical stocks.