June 9, 2017
With just a few seats still to declare, the exit polls have been proved right and it is now clear that PM Theresa May’s decision to call an early general election has backfired badly.
The Conservatives will remain the largest parliamentary party but with an expected final tally of around 318 seats, they have suffered significant losses and will fall short of the 326 seats needed for an outright majority. This leaves the UK facing a hung parliament and a major question mark hanging over the future of the PM.
May has indicated that she has no intention of resigning but could well be forced to do so by her party which will see yesterday’s result as close to a disaster. In any event, the lack of an outright majority means that the Conservatives will either have to form a minority government – which would be inherently unstable – or seek the support of at least one of the smaller parties. The latter option should be the more robust but could prove untenable given sharp differences over some key aspects of policy. Support from the Democratic Unionist Party (DUP), which took 10 seats, could be enough but there is every chance that there will have to be yet another election to sort out the mess.
There is no official time limit on putting together a coalition government (in 2010 it only took only five days although that was considered unusually quick) but the new parliament is supposed to meet for the first time on 13th June. Ultimately, if the new government is to have any chance of survival it must be able secure enough support in the Commons to pass its proposed new legislation in the Queen's Speech. This is due on 19th June.
Predictably, currency markets initially reacted very badly. Heightened uncertainty about almost all aspects of UK government policy is just about worse case for international investors and the pound lost ground against both the euro and U.S. dollar. In particular, the result clouds the Brexit negotiations, also expected to begin in earnest on 19th June. May’s early election call was supposed to provide her with a mandate to enter the talks with a significantly strengthened bargaining position. The Conservative line has been that no deal is better than a bad deal, making a hard Brexit all the more possible. Now that stance may have to be tempered (which, ironically, might ultimately prove positive for the pound).
The Prime Minster won her seat comfortably enough and has promised a period of stability. Quite how she intends to achieve this if far from clear and for investors, that cannot be good news.