UK Snap Election Heightens Uncertainty in Europe
A UK general election has been called three years ahead of schedule, primarily with the aim of giving the government a stronger mandate in the EU leaving negotiations as Brexit continues to divide the nation and the government. The snap election is set to proceed with government approval and will mean that with elections due in 2017 in Europe’s three largest economies of Germany, France and the UK (contributing 43.1% of European GDP in 2016), volatility in Europe is set to worsen.
The UK snap election is a U-turn from Prime Minister Theresa May’s previous opposition to the idea. However, it is also strategically-timed having been announced after the UK triggered Article 50, which has committed the country to leaving the European Union, and before the real economic effects of Brexit are felt, given the economy has displayed resilience so far via a boost to exports from the weaker pound. UK unemployment in 2016 stood at 4.8%, below the pre-global financial crisis rate of 5.3% in 2007. Although the Brexit-opposed Liberal Democratic party are likely to attempt a come-back by riding the waves of the “Remain” sentiment, the ruling Conservative and opposition Labour parties have both committed to seeing through the result of the referendum – a reversal of the Brexit decision is not on the cards but the election will determine a hard or a soft Brexit outcome, both of which can be examined through Euromonitor’s Macro Model Scenarios.
Source: Euromonitor International from national statistics/International Monetary Fund (IMF) WEO, International Financial Statistics/Eurostat/OECD/UN
Note: Real GDP Growth is seasonally adjusted. 2017 data is forecast.
Euromonitor’s baseline scenario predicts a slowing of UK real GDP growth in 2017 and 2018 to 1.4% and 1.1% respectively from 1.8% in 2016, while our Macro Model No-deal Brexit scenario would lower real GDP growth by 2.9 percentage points over a five-year period. The Light Brexit sceanario incorporates a softer outcome as a result of pressure from pro-EU factions in the UK government which would also relax the negotiations over immigration in return for access to the single market and passporting rights to preserve London’s financial sector. Under this Light Brexit scenario, UK real GDP growth would improve by 0.8 percentage points above our baseline forecast to 1.9% in 2018 compared to a no-deal Brexit of just 0.02% in the same year. The Light Brexit outcome would also improve the outlook for unemployment and inflation.
Macro Model Scenarios for the UK: 2015-2020
Source: Euromonitor Macro Model
What is more clear is that weeks of campaigning leading up to the June election will add further uncertainty to an already highly ambiguous UK outlook. This will weigh on confidence and encourage investors to continue to hold off investment decisions until after the elections so it may well be now that we will start to see a slowing of economic growth. Euromonitor forecasts that UK real GDP growth will slow from Q2 2017 onwards to reach 0.8% annually by Q4 2017 compared to 2.0% a year earlier. With major elections also taking place in France and Germany, the wave of uncertaintyand move towards populism will continue to dominate the European political landscape.