Following the agreement of a third Brexit extension until the 31st January 2020, the UK Parliament voted in favour of an early UK general election, which took place on the 12th December. What outcomes should we expect from the results? Discover the analysis of Dirk Schumacher, Head of European Macro Research at Natixis.

Convincing victory for Tories in UK elections: Brexit will now “get done”

A landslide victory for the Conservatives

The Tories gained an absolute majority with the obtention of 364 seats in yesterday’s election. The result paves the way for an approval of Mr. Johnson’s withdrawal agreement by Parliament. There is now little doubt that the UK will leave the EU by the end of January.

The next step in the Brexit process is the negotiation of a trade deal between the EU and the UK, for which the deadline is the end of 2020. Until then a transition phase will set in, during which there are no material changes from the current status quo. The deadline clearly looks ambitious, not least as similar negotiations with other countries lasted several years before an agreement was found. Thus, while Mr. Johnson has said repeatedly that it should be possible to negotiate a deal by then, this seems rather unlikely. Consequently, the risk of a hard Brexit at the end of 2020 still exists.

A new deadline extension to come?

It seems likely, however, that the deadline will simply be extended, despite vows of Mr. Johnson and the Tories not to do so. For one reason, neither the EU nor the UK have any interest – now that Brexit is a fact – to have another cliff edge risk end of next year. Mr. Johnson must show now that Brexit “works”, and that the UK will be better off outside the EU. Mr. Johnson will most probably end up being quite flexible, in line with his past behavior on this matter. Moreover, the strong result in yesterday’s election has clearly strengthened Mr. Johnson’s position within the Tories, reducing the risk of a revolt of the “hardcore” Brexiteers within his party should the deadline be extended.

The EU, on the other hand, will have to find a modus operandi with the UK and develop a new working relationship. The EU will certainly try to extort some concessions from the UK in the negotiations and there can be little doubt that there will be a price to pay in terms of market access for the UK. But the EU will ultimately want to reach an agreement with the UK. All this points to long-lasting, but still constructive negotiations.

A reenergized market

Markets reacted quite positively to the outcome, though this may be more a consequence of what the alternatives looked like than a genuine belief that Brexit will be beneficial for the UK. In any case, uncertainty over the future of the country now looks smaller than over the last couple of months. One could expect this to also translate into some pick up in investment spending, which has been essentially flat since 2016. This, and a strong expansion of government spending, should lead to a gradual re-acceleration of growth in the UK in the coming quarters.