UK vote eases corrosive uncertainty hurting businesses

The British election result is a boost to the economy and financial markets in the short term as it will ease some of the uncertainty over Brexit that has hobbled business confidence during the past three years. In the longer term, it remains unclear how the Conservatives of Prime Minister Boris Johnson will steer the economy, particularly since so much of Britain’s future trade relations remain to be negotiated once it has left the European Union, as scheduled, on Jan. 31.

“Today’s result of a Conservative majority means that Brexit is likely to occur quite quickly,” said Sarah Carlson, senior vice president at credit ratings agency Moody’s. “However, Brexit-related uncertainty is unlikely to abate for more than a few months,”

The pound and British stocks jumped higher on the outcome of the vote. The currency rose 2 cents against the dollar to $1.3450 late Thursday, when the first exit polls were made public, and has held onto its gains. The FTSE 100 of leading British shares rose 1.6% upon opening on Friday.

While Britain’s departure from the EU has long been considered damaging for businesses - particularly in Britain but also in neighbouring EU countries like Ireland and the Netherlands - the delay in carrying out the exit itself has arguably proved as painful. Over the three and half years since the referendum to leave the EU, businesses in Britain have reined in investment and hiring as they awaited clarity on the terms of Britain’s departure, or whether it would leave at all.

A sudden, non-negotiated break away would result in overnight tariffs on trade, checks on borders and limits on immigration. As part of the EU, goods, money and people have full freedom of movement. A negotiated exit - which Johnson secured this year - would be less disruptive but how it affects the economy will still depend on more detailed negotiations on future trade relations.

The prime minister has signalled that he wants looser economic ties with the EU, Britain’s biggest trading partner, in order to have the freedom to pursue commercial deals with faster-growing economies further afield - from the United States to countries in Asia.

That approach could hurt British businesses that depend on supply chains that snake across EU countries and on easily hiring EU workers - both highly skilled professionals as well as seasonal workers in agriculture, for example.

Johnson’s plan is to bring Britain out of the EU by the end of January on the basis of his Brexit divorce deal. After that, the outlook remains unclear.

Now that he has a strong majority, Johnson could approach those talks with the EU on future trade ties with a greater willingness to keep close ties. Until this election, he had depended heavily on the support in parliament of a fringe of the Conservative party that has long wanted a sharp break away from the EU.

But Johnson is still likely to find it difficult to provide longer-term clarity for the economy, analysts say. If Britain leaves on Jan. 31, it would have a “transition period” until the end of 2020, whereby it will remain in the EU’s tariff-free single market and customs union.

That means Johnson’s government needs to secure in just a few months a free trade deal that would typically take years to secure. Given the size of his majority in the 650-seat Parliament - currently at 78 - he may now have more flexibility to extend that transition period for another two years to facilitate the trade deal with the EU.

“This is the beginning of the reality of Brexit rather than the end,” said Ross Denton, a trade expert at law firm Baker McKenzie. “The U.K. will have to consider its future trade relationship with (the EU) and it is unlikely to be able to negotiate a comprehensive free trade agreement in just 11 months.”

Domestically, big companies seem relieved at the decisive defeat for the opposition Labour Party, which wanted to nationalize some industries and raise taxes on business.

The Confederation of British Industry congratulated Johnson and the Conservatives in a statement and urged them to “break the cycle of uncertainty.”

Johnson will face pressure to deliver on his electoral campaign promises to increase public spending on sectors like healthcare, after almost a decade of budget cuts that have eroded public services, worsened wealth inequality and stymied the economy. Together with an expected pick-up in private investment, that could help the economy as it faces the next phase in the Brexit process.

“While the U.K. still faces serious risks and uncertainty from the upcoming U.K.-EU negotiations on the future relationship, the election result could be the first step towards a sustained economic and political recovery,” said Kallum Pickering, senior economist at Berenberg bank.