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16 Jun 2017

2017 General Election Aftermath: What Next for Business?

2017 General Election Aftermath: What Next for Business?

In this post, we’ll drill into the election result’s business implications. Is a hung Parliament good or bad for the British economy? For the Brexit negotiations?

Thinking about the result, we’re tempted to ask, “Who ordered that?”

We assigned a hung Parliament a much greater likelihood at 40% than the betting markets at roughly 17%, and many pundits who confidently forecast a stonking Conservative majority, but accepted it was a bold prediction. So, it still came as a bit of a surprise.

As a rule of thumb, markets loathe uncertainty.

If they don’t know what governments will do, they tend to hold off investment until the picture becomes clearer and they are more assured of a return.

The hung Parliament is a problem because, although the Conservatives won the most number of seats, they won less than half and must rely on others, in this case the Northern Irish Democratic Unionist Party (DUP), to get their agenda through. As a result, almost nothing contentious, over which the Conservatives and the DUP are likely to disagree will get done and there’s risk of another snap election, of which the outcome will be unknown, should either the Conservatives deem it in their interest, or the Government is toppled in a confidence vote by everyone else, and an alternate government cannot be formed.

One example of political paralysis storing up greater problems down the road is Britain’s spending addiction. The annual deficit, the amount borrowed annually, is roughly £50 billion. The hung Parliament means controversial decisions to cut it, such as ending the pensions triple lock, likely won’t find majority support and will be shelved. And that’s notwithstanding the absence of political will from the Conservatives to balance the books anyway, some of whom have pinned seat losses on austerity.

Borrowing’s bad because it not only ‘crowds out’, or makes less money available to the private sector, but in the end, encourages politicians to whack up taxes as an alternative. Neither bode well for the economy. And maxing out the national credit card now means greater pain later when recession, which typically reduces tax revenue and ups borrowing to compensate, piles further debt on to an already unsustainable load. We could be more unprepared than we were confronting the Great Recession in 2008.

True, bond yields are historically low, reducing the interest we pay servicing the national debt, but sentiment could change rapidly. In which case, we’d be shelling out far more than we do already – and debt interest currently is almost as much as the defence budget.

Then there’s the Brexit negotiations.

Complex and likely to cause controversy, they’ll be hard for a hung Parliament allergic to big and bold action to conduct. It’s improbable that Article 50 will be overturned, since it would require the other 27 countries in the EU and Parliament itself to agree to it, so the UK’s still on course to leave the EU in March, 2019. Unless there has been another election in the interim that produces a majority government, the consequence is the Government will have to work doubly hard not only to come back with a deal that pleases all wings of the Conservative Party, but also the DUP. The EU, acknowledging the Government’s weak hand, might also offer a worse deal since any threat to walk away would be less credible.

Certainly, the debate over a ‘Hard’ or ‘Soft’ Brexit, hinging on Britain’s continued membership of the Single Market and Customs Union, has broken out again with figures from the Government’s own side, including Ruth Davidson and Philip Hammond, arguing the election’s an opportunity to row back from Prime Minister Theresa May’s earlier commitment to make Brexit mean leaving the Single Market and Customs Union behind.

It’s uncertain who’ll win out, but we believe, since this debate has already played out and the Labour leadership support departing the Single Market, we’re still on track for the same outcome – not in the European Economic Area, like Norway, but with a mesh of bilateral agreements with the EU, like Switzerland.

So far, the economic picture post-election is mixed.

A snap poll measuring business confidence amongst the Institute of Directors’ 700 members revealed it had dropped “through the floor”, but the stock market has remained upbeat, largely because continued Single Market membership seems more likely and a weaker pound, which brings its own advantages to exporters and disadvantages to importers, has boosted companies whose earnings are denominated in other currencies, like the dollar, who’ve stayed strong.

We think there will be little immediate economic harm from the hung Parliament. History suggests business activity doesn’t drop off a cliff when they occur – expectations rapidly adjust to what minorities can accomplish and pacts with other parties can afford some stability. James Callaghan’s Labour Government lost its majority in 1977, but was sustained by an agreement with the Liberals until the following year over which GDP growth went up and inflation fell.

Rather, its implications – for austerity and Brexit – will be felt some time down the road, probably years away and into future Parliaments.

Which brings us to the question of the next election. Politics since 2015 has been unusually volatile. Two general elections, and a referendum, have seen almost no party leader emerge unscathed with a mad scramble by the parties to recalibrate their positions, particularly on the EU, to something closer embodied by the electorate and win approval for it. And approval is hard to make out in the last election. Technically, since Parliament’s hung, no party won in the traditional sense.

But don’t expect another election soon. The public didn’t want a general election this year, won’t want another for some time and the parties too are completely fatigued, tired of campaigning and with depleted war chests. On the other hand, we can’t envisage this Parliament running a full five years. Unless a coalition’s in place, hung Parliaments generally don’t endure, running only a year or two. We envision the most likely scenario being an election either just before, or just after, conclusion of the Brexit talks in 2019 – the deal might not go through Parliament, in which the Conservatives go to the country to get a mandate, or it does and an election’s called to govern the country thereafter. In any case, it’s difficult to see Theresa May heading into the next election as leader and not so difficult to see Labour, under Jeremy Corbyn, winning it.

In these uncertain times, getting an edge over your competitors really makes a difference.

Khaos Control, our business management solution, gives you that edge. Its whole premise is maximising business efficiency, getting away from multiple software packages, spreadsheets, and pen and paper. Putting all your business data in one place, on one system, so you’ll benefit from reduced error, automation and freeing your staff to do what matters. It helped Micro Scooters, who’ve reported over £100,000 of savings through improved processes since going live with us in 2015.

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