The UK will be heading to the polls on December 12 of this year.

Current polls suggest the Conservatives will win an outright majority but the numbers are tight.

So, on balance, it is believed that an outright majority for the Conservatives or another hung Parliament are equally likely outcomes.

Should the Conservatives get an outright majority, the Parliament is expected to ratify Prime Minister Boris Johnson’s Brexit withdrawal deal.

The deal would see the UK leave the EU but stay in a transition period until the end of 2020, or until the end of 2022, if mutually agreed by the UK and the EU by next summer. 

In the event of a hung Parliament, uncertainty will likely persist.

This outcome could lead to a further Brexit delay, a ratification of Johnson’s Brexit withdrawal deal, or even a second Brexit referendum.

In any event, a no-deal Brexit seems to be a very low-probability event, with only one party (the Brexit Party) likely to campaign on a no-deal platform.

That said, the potential key takeaways for the economy and the market could be:

1. Limited benefit for U.K. growth

Brexit uncertainty and weak external demand have weighed on activity and hence lead U.K growth to slow down since the start of the year.

In the event of further Brexit clarity after the election, a rise in investments owing to pent-up demand and delayed projects may be seen, together with a boost in business confidence. 

More importantly, U.K. growth will continue to be shaped by global developments, especially as the country’s two largest export markets, the US and Germany, are expected to slow down in the coming months.

Offsetting some of this weakness, a new Parliament may pave the way for more political stability and fiscal loosening in 2020.

On balance, while a short-lived recovery in activity after the election might be seen, UK growth is still expected to remain at or below trend in 2020.

Making reference to inflation, domestic cost pressures are elevated, with wage growth close to an 11-year high and subdued productivity growth.

Regardless of a Brexit deal, companies are expected to absorb the higher wage bills in their profit margins, as opposed to passing them on to consumers - in line with similar trends seen in the rest of Europe.

Overall, UK inflation is expected to remain somewhat muted, just below the Bank of England’s 2% target, through the remainder of the year and the beginning of 2020.

Over the medium term, Johnson’s Brexit deal would likely lower UK potential growth somewhat, aggravating the country’s already weak productivity profile.

Outside the single market and customs unions, there will be both tariff and non-tariff barriers between the U.K. and the EU, lowering trade between the two regions.

The extent of the growth weakening would depend on the nature of the future trading arrangements negotiated in the coming years.

That said, productivity has been at depressed levels for some years, and some mean reversion in productivity trends may more than offset any negative impact from the new trading arrangement with the EU.

2. Bank of England on hold

The Bank of England has recently judged that, in the event of a smooth Brexit outcome, its policy rate would likely have to increase at a gradual pace and to a limited extent.

With both the ECB and the Fed in easing mode, it will be difficult for the Bank of England to increase at a gradual pace without strengthening the pound and cooling economic activity too much. 

3. Improving global risk sentiment

It has been said countless times that geopolitical risks are one of the swing factors for global growth outlook.

With the risk of a no-deal Brexit more contained, and with the U.S.-China trade tensions on temporary hold, downside risks look to have receded somewhat in the past few weeks.

This could lead to a positive for global sentiment, particularly in the manufacturing sector, one of the main sources of upside risks that has been identified to affect the outlook of global growth.

This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri.

For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.