Simon Ward, Chief Economist at Janus Henderson Investors, shares his views on the outcome of the UK election.
UK markets have weakened rather than plunged because the election result has mixed implications. The obvious negative aspect is the prospect of prolonged political uncertainty, with a severely weakened government limping towards a change of Conservative leadership and second election later in 2017.
On the other hand, the result has revealed that a majority of the British electorate supports neither the uncompromising Brexit approach embraced by Theresa May nor the 1970s-style spend-tax-and-borrow plans of Jeremy Corbyn’s Labour party. This raises the possibility of a party or parties coalescing, probably after another election, around a platform involving a “softer” Brexit and centrist economic policies, an outcome that would be unambiguously positive for markets.
It is difficult at present, however, to envisage how such a convergence could occur – the Conservative party may be constrained by its dominant eurosceptic wing from making the necessary movement, while Jeremy Corbyn has strengthened his grip on the Labour party and will view the election result as vindicating his economic policy approach.
The prospect of prolonged political paralysis is not necessarily negative for the economy and markets, as continental European experience has repeatedly shown. The difference, of course, is that the Brexit clock is ticking. Markets may show patience in the near term but need to sense a path towards the formation of a stable government able to start negotiations by late 2017. Much will depend on whether the EU holds out an olive branch by offering to extend the Article 50 timetable to allow for the necessary political realignment.