Theresa May’s shocking loss in the recent UK election will have effects that are felt throughout the country and region for years.
With just two weeks to go until Brexit negotiations are set to begin, May’s future influence and the Brexit timeline are now being questioned.
Things are already showing up in the economy and stock market as the country heads into what could be a very volatile time.
Business Optimism Down
A good measure of an economy’s future is to gauge the feelings of business leaders who are engaged in the day-to-day work. In this case, the future doesn’t look promising. A survey of business leaders taken after the election found that 57% are pessimistic about the UK’s economy over the next year. That’s a higher number than directly after the Brexit vote last summer, when 43% of survey respondents were pessimistic.
“It is hard to overstate what a dramatic impact the current political uncertainty is having on business leaders, and the consequences could—if not addressed immediately—be disastrous for the U.K. economy,” said Stephen Martin, director general of the Institute of Directors, which ran the survey.
Business leaders are especially concerned about how their companies will fare as the UK heads towards Brexit with a lowered pound and less negotiation power for trade agreements.
Volatile Stock Market
As election results began to come in, the pound sunk lower and lower and ended up down 1.43% against the greenback. Overall, the pound fell against 158 foreign currencies. However, bad news for the pound led to strong market results, although stocks in the region were pressured. The FTSE 100 jumped 78 points after the open on Friday, the day after the election, due largely to the high humber of foreign companies on the exchange.
“Large FTSE 100 companies are of course highly sensitive to movements in the exchange rate because in aggregate over 70% of their earnings are derived outside of the UK,” said Jason Hollands, managing director of investment management group Tilney. “Therefore, the reaction from the FTSE 100 may largely reflect this rather than a direct verdict on the policy implications or the read across to the outlook for the domestic economy.”
In general, stocks focused on international sales were up, while more domestically focused stocks tended to be down slightly, which is a similar reaction to directly after the Brexit vote. In the U.S., the election results had a positive effect on stocks, with futures pointing higher at the open on Friday. Trade in Asia also finished mostly higher. Despite the upswing, many experts predict that international confidence in the UK market in general will suffer.
The good news is that the pound is expected to recover fairly quickly. The last time the UK had a hung Parliament, in 2010, the pound rebounded within a month of a coalition being formed and was up almost 3.5% within the month.
Effect on Brexit Negotiations
When May called for the election, she expected the timing just before Brexit talks will start to be to her advantage and to give her party a boost of momentum. However, with the loss of power, the timing is now causing even more uncertainty.
As May tries to negotiate an alliance with the Democratic Unionist Party, more than 90% of survey respondents said they are worried about the government’s structure and its impact on the economy. Topping the list of their concerns was the UK’s ability to land a trade deal with the EU after Brexit, especially if the government and economy are now viewed as unstable.
We’re likely only beginning to see the effects of the election results, and the stock market could continue to change, but for now the volatility appears to be only short-lived.