Conservatives win landslide victory in UK Elections

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After months of half truths, hollow promises, claims of greatness, veiled threats and televised showdowns, it’s finally over.  No, I’m not referring to the overhyped but ultimately disappointing Mayweather vs Pacquaio “fight-of-the-decade”, but the far more unexpected outcome of the UK general election. The ruling Conservative Party has comprehensively won the battle and war for the hearts – or at least the minds – of UK voters.

 

Prime Minister Cameron’s party won a far-larger than expected 329 seats, clear of the absolute majority of 326. Labour (232 seats) and the Liberal Democrats (8 seats) were by far the biggest losers and both party leaders have already resigned. The Scottish National Party (SNP) won all but three of the 59 seats up for grabs in Scotland. In Northern Ireland, the Democratic Union Party DUP and Sinn Fein again emerged as the largest parties with 8 and 4 seats, respectively. The smaller parties, including the UK Independence Party (UKIP), the Green Party and Welsh Plaid Cymru, have performed as expected, winning only a handful of seats. The winner of the St Ives constituency seat will be announced at about 16:00.

The Conservative Party will thus be forming a majority government, confounding predictions of another coalition government and raising question marks about the usefulness of pre-election polls which had shown the Conservatives and Labour neck and neck. Moreover, for all the talk of the emergence of multi-party politics, the three largest parties still hold 95% of the seats.

Sterling and UK equities have perhaps unsurprisingly responded positively to a market-friendly Conservative government ruling single-handedly for another next five years. There is some room for this rally to extend but sterling faces sterner challenges ahead, including the financing of large twin deficits, lukewarm macro data and the omnipresent threat of a referendum on the UK’s EU membership.

Figure 1:  Conservatives are three seats clear of an absolute majority


Olivier 1

Source: UK Parliament

 

Notes: (1) This column does not add to 100% as a number of smaller parties are excluded;  (2) Adds up to 649 as the winner of the seat for St Ives will only be anounced at about 16.00

 

Conservatives and SNP land winning punch, Labour and Liberal Democrats down and out

  • The ruling Conservative Party won 329 seats in the 650-seat lower house of parliament (see Figure 1). This is a far greater number than the 280 seats or so that polling forecasters were expecting and a 27 seat increase of the number of seats the Conservatives held. Crucially this gives the Conservatives a reasonably comfortable working majority of 6 seats and a slim absolute majority of 3 seats. The working majority (323 seats) is calculated as 650 seats minus the four Sinn Fein MPs who typically don’t take their seats and the speaker of the house who is apolitical and does not vote (645), divided by two and rounded up.

 

  • Conversely, Labour won only 232 seats, about 38 seats short of pre-election forecasts and a 24-seat loss. Labour leader Ed Miliband has resigned, and election campaign chief Douglas Alexander and shadow chancellor Ed Balls both lost their seats. Deputy leader Harriet Harman will be interim leader until a leadership contest.

 

  • Similarly, the Liberal Democrats won only 8 seats, a third of the number forecast based on pre-election polls and a massive 48 seat negative swing. Nick Clegg retained his seat but has resigned as party leader and a number of high profile Liberal Democrats MPs, including Business Secretary Vince Cable, Chief Secretary to the Treasury Danny Alexander, former party leader George Kennedy and former deputy leader Simon Hughes have lost their seats. The Liberal Democrats are now only the joint fourth largest party in the lower house.

 

  • The SNP won 56 of the 59 seats up for grabs in Scotland, a larger number than derived from even the most optimistic pre-election polls and a significant 50 seat swing.

 

  • UKIP, which had polled as high as 16% late last year, won 13% of the national vote but secured only one seat as a result of the first-past-the-post system. Party leader Nigel Farage lost his seat and has resigned.

 

  • In Ireland, where 18 seats were being being contested, the DUP again won 8 seats as expected, Sinn Fein lost a seat and now has 4 members of parliament and the SDLP again won 3 seats. The Ulster Unionist Party (UUP) is back in parliament with 2 seats and an independent won the final seat.

 

  • The Welsh Plaid Cymru and Green Party threw up no surprises, winning 3 and 1 seats respectively.

 

  • The Northern Irish Alliance party and the Respect party both lost their seats in parliament and Respect leader George Galloway is being investigated for re-tweeting exit poll results in breach of electoral rules.

 

What now

With the Conservatives enjoying a reasonably comfortable working majority, the next few weeks should be pretty straightforward. The first litmus test will be the parliamentary vote in early June on the Queen’s speech which has been pencilled for 27 May but it should pose the Conservatives no problem (see Figure 2). Markets’ attention is likely to soon re-focus on key macro data, including manufacturing, employment and inflation numbers due in the next ten days

Figure 2: Key dates
Key Dates

Source: UK Parliament, Bank of England, www.olivierdesbarres.co.uk

 

A quick post-mortem

The debate about the pros and cons of a two, even three or four party coalition government proved futile and today’s result raises question marks about the usefulness of pre-election polls which had shown the Conservatives and Labour neck and neck with 34%. Opinion polls have historically not been very accurate guides to actual UK election outcomes, unlike in the US, but on this occasion they were particularly misleading.

Moreover, for all the talk of the emergence of multi-party politics, the three largest parties still hold 95% of the seats. Undoubtedly the merits of the first-past-the-post electoral system will again be scrutinised, with UKIP in particular debating the validity of a system which gives a party with 13% of the national vote only one seat in parliament.

There will undoubtedly be a lengthy post-mortem on this surprising election result but I would list the following factors as having played a role:

  • As in previous elections when the Conservatives were forecast to lose many seats, they actually outperformed relative to opinion polls (see UK election: asymmetric risk to sterling, 30 April 2015).
  • The “protest vote” shifted from the Liberal Democrats to UKIP – as reflected in the latter’s high-share of the national vote but the first-past-the-post electoral system meant that UKIP only got one seat and did not really hurt the Conservatives.
  • Tactical voting: concerns about SNP yielding great influence over English politics by joining a Labour-led coalition likely pushed UK voters to vote against Labour, to the benefit of the Conservatives.
  • Liberal-Democrats likely paid a heavy price for perceived policy u-turns, notably on school fees, and for backing a Conservative-led coalition.

 

Sterling – Room to bounce but further challenges ahead

The FTSE 100 is up 2% in early trading and sterling has rallied sharply since the first exit polls were released last night, appreciating 1.5% vs the USD and 2.2% vs the euro. This is broadly in line with my expectations that the currency market would view a pro-market, pro-business Conservative government in a favourable light (see UK election – asymmetric risk to sterling, 30 April 2015).

There is scope for this rally to extend as markets will not have to contend with a protracted period of coalition-building and uncertainty and sterling had cheapened in the months prior the election (see Figure 3). Indeed, the sterling Effective Exchange Rate (EER) had weakened about 2% in the two months prior the election due to a likely combination of political and policy uncertainty coupled with disappointing economic data (the EER simply measures sterling’s performance versus the currencies of the UK’s trading partner and thus a good of sterling’s competitiveness).

Figure 3: Changes in sterling EER before and after 2010 and 2015 UK General Elections (%)

Olivier Desbarres

Source: Bank of England, www.olivierdesbarres.co.uk

However, it’s not obvious that a sterling rally will have much staying power.

  • For starters, the sterling EER is already near six and half year highs (see Figure 4).
  • The UK has large twin deficits to current account and fiscal deficits of around 5.5% of GDP to finance, leaving it reliant on foreign FX inflows. The likely extension of market friendly policies under the Conservatives will be supportive of such flows near-term. But if weak productivity growth undermines GDP growth, which slowed sharply in Q1, those vital FX inflows may taper.
  • Furthermore, Prime Minister Cameron has committed to a national referendum to the UK’s membership of the European Union in 2017 while the SNP’s strong performance could embolden it to push for a second Scottish independence referendum. This dual threat of Scotland leaving the UK and the UK leaving the EU, whilst pretty meek in my view, may also take some of the wind out of sterling’s sails in the medium-run. In particular, Cameron will want to secure a yes vote for UK membership of the EU which will likely entail gaining concessions from EU partners – which history suggests can be a bruising exercise. See When you’re behind play a big hand: EU light, 2 December 2014.

Figure 4: Sterling’s bounce post-election may lack legs medium-term

Sterling Effective Exchange Rate Source: Bank of England, www.olivierdesbarres.co.uk  

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