The elections did not go as Prime Minister Theresa May and the Conservatives had planned. May’s Conservatives won the snap elections on June 8 with 318 seats (12 less than 2015 elections), but lost the parliamentary majority (326 seats necessary for majority) securing 42.4% of the votes. Jeremy Corbyn’s Labour party secured 262 seats (40% of the votes), and the Liberal Democrats and SNP shared most of the remaining votes.
With Theresa May lacking parliamentary majority, she is seeking support from the Democratic Unionist party (DUP) to form a coalition government. A minority government or an inter-party agreement is likely between the Conservatives and DUP, and Theresa May will seek a confidence and supply arrangement. In return, the DUP will demand access to the single market – Northern Ireland is currently a beneficiary of EU policies, funds and trade – no hard border in Ireland, increased power to devolved administrations and increased funding allocated for Northern Ireland.
Fundamentally, this election proves that public opinion and parliament dynamics shifted towards a soft exit from the EU. According to polling results, more than 50% of the voters are opposing a hard Brexit. Theresa May’s cooperation with DUP – a pro-soft Brexit party – signals that the DUP is likely to urge towards a more pragmatic Brexit, opposing the UK losing access to the EU single market.
Although a potential coalition between the Conservatives and the Democratic Unionist party points to a softer Brexit for the markets, it is unclear if the election result would have a decisive impact on the final deal made, and therefore on the UK economy in the following years. Ultimately, a softer Brexit depends on the evolution of the negotiations. As a result of the elections, negotiations will be tougher for the UK, putting more pressure on Theresa May who will be negotiating with a weaker, more disunited mandate from the British electorate. MNCs should maintain a cautious outlook for the UK in light of such high political uncertainty in the next 12 months.
This election has changed the political dynamics in the country, and a change in the Conservatives’ leadership or snap elections in the short-term become more likely, creating more pound depreciation pressures in H2. A hung UK parliament likewise increases uncertainty and is likely to delay Brexit negotiations as the cabinet reshuffles and gets in full force while Brexit timelines remain equally strict. Thus, the likelihood of a vote of no confidence and new snap elections in the next 12 months has risen, right as negotiations start to gain steam after June 19th, the formal start of the new UK parliament.
Corbyn secured 40% of the votes compared to 30% in 2015 at the expense of the Conservatives and smaller parties like the Scottish National Party and UKIP, and younger voters abstained less than in previous elections, strengthening the vote for Labour. Although the Conservatives’ vote share increased compared to the 2015 elections, as mostly the smaller parties weakened, Jeremy Corbyn’s successful pro-soft Brexit and anti-austerity election campaign considerably increased the popularity of the Labour party. Anti-Brexit voters opposed to May’s hard Brexit manifesto; last minute policy U-turns; as well as the recent fatal terrorist attacks in Manchester, Borough market and London Bridge significantly hurt Theresa May’s credibility and her popularity ahead of the elections. In the case of new snap elections in the next months, the Labour party is likely to strengthen, and the pound to increasingly lose ground.
Overall, the markets are pricing-in less Brexit uncertainty compared to the June 23, 2016 vote, as seen in GBP:USD currency movements. The rate of the British pound to the dollar weakened by 1.8% in the announcement of a hung parliament for the Conservatives, whereas the day after Brexit in June 2016 it weakened by over 8%. However, more depreciation pressures are expected in H2 2017 when Brexit negotiations kick-off, the EU27 make increasingly frequent hardline statements, and political uncertainty defines the tone of the negotiations and the outlook for the pound in 2017 and beyond.