Paul O’Connor, Head of Multi-Asset, discusses the market implications of the recent UK government resignations.

Key takeaways:

  • Confidence in UK Prime Minister Boris Johnson has taken another blow, with the resignation of senior cabinet ministers, Rishi Sunak and Sajid Javid.
  • Expectations are that the new Chancellor, who faces formidable economic challenges, will lean towards more fiscal generosity than his predecessor.
  • Despite this, UK markets did not react significantly to the news given it is unlikely that the new Chancellor will be able to substantially alter the course of the UK economy.

UK Prime Minister Boris Johnson remains in office, but his political power is fading. He has lost the support of the electorate and his popularity among his own party is rapidly declining. A YouGov poll yesterday showed that 54% of Conservative voters believe he should resign. Last month, more than 40% of Conservative Party MPs opposed the Prime Minister in a vote of confidence. Yesterday’s resignations shows that opposition to Boris Johnson has now reached his own inner circle of cabinet ministers. Many believe that his tenure as Prime Minister is now unsustainable. Betting markets suggest that there is less than a 20% chance that Boris Johnson will still be in office by the end of the year.1

The Prime Minister might voluntarily step down, but he has shown no intention of doing this, so far. Otherwise, his opponents have no formal mechanism for displacing him, without a change to Conservative Party leadership election rules. These stipulate that the leader cannot be put to another vote of no confidence until June 2023. However, next week’s elections to appoint a new executive for the 1922 Committee, that sets these rules, might change this. A number of MPs have expressed an intention of amending these rules, to allow an earlier vote. If either of these paths do lead to a Conservative leadership contest, a new Prime Minister would probably be appointed within a couple of months.

Financial markets will evaluate developments here in terms of their impact on economic policy. The outgoing Chancellor has highlighted differences in opinion on fiscal policy as being a key reason behind his resignation. Expectations are that the new Chancellor will lean towards more fiscal generosity than his predecessor has been recently. He faces formidable challenges. He inherits an economy in the grip of a cost-of-living crisis, with consumer confidence at the lowest level on record, below those seen during all the recessions since 1980. However, with inflation at a 40-year high and looking set to hit double digits soon, the Bank of England is likely to be metronomically raising interest rates at all its remaining MPC meetings this year.

The new Chancellor is not going to be in a position to substantially alter the course of the UK economy. This probably explains why sterling and other UK assets have barely moved on the news of these resignations and appointments. The best he can hope for is to help steady the ship, until the global economic storm has passed.  Some targeted fiscal measures seem more likely than an attempt at introducing a transformative new policy regime.

1 Betfair, as at 7 July 2022. Betting odds mid-point for Boris Johnson to exit before the end of 2022 is 1.145.

 

Glossary

Fiscal policy: Connected with government taxes, debts and spending. Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.