The Conservatives’ large majority will give the economy some much-needed breathing space over the next six months. Business confidence should recover, now that a no-deal Brexit isn’t a risk in January 2020 and the outlook for domestic policy over the next five years is relatively clear. Many firms will be able to invest, knowing that corporation tax likely won’t rise, wages won’t increase rapidly and Labour’s socialist agenda will not be implemented soon. Consumers’ confidence also might recover—though a majority of people didn’t vote Conservative—and the recovery in sterling to $1.35 will help to keep CPI inflation below the 2 per cent target next year, supporting real incomes.
Nonetheless, Brexit is a losing game for the economy and now it is only a question of when and how much additional pain will be inflicted. In theory, the Conservatives’ large majority gives PM Johnson useful flexibility during the all-important trade talks with the EU next year.
A large majority makes it easier for him to make the Commons accept either an extension of the transition period or to accede to some rule-taking in order to facilitate a semi-decent trade deal. The group of 28 hardline Eurosceptic MPs who voted against Theresa May’s Withdrawal Agreement, in a bid to achieve a no-deal Brexit—who all have held onto their seats—will not be able to restrain Boris Johnson.
However, the Conservatives’ manifesto clearly states that the transition period will not be extended beyond December 2020. The Withdrawal Agreement also states that any extension request must be approved by the end of June, when the UK government probably still will have unrealistic expectations for the trade deal. In all probability, then, the UK will be facing the uncomfortably high risk of another Brexit cliff-edge in December 2020, dampening the economy again in the second half of next year.
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