The removal of Prime Minister Boris Johnson will trigger a change in leadership for the Conservative party and the UK. But Johnson’s resignation should have a limited market impact. While his successor will need to pursue a modest fiscal expansion, the composition thereof depends on the leader. Foreign policy is likely to be modestly less confrontational with the EU while hawkish Ukraine policy should remain unchanged.
From here, the first stage of Conservative party politics is selecting the next leader. We have been here before – and not too long ago. The Tory party is quite unusual for its leadership selection process, with the parliamentary grouping voting repeatedly until two favourites remain. From 1995-2016, this was done within 1-3 rounds as there were a limited number of credible heirs. In 2019, it took five rounds to whittle down to 6 candidates. In 2022, we would presume a similar number of rounds as there are multiple party factions.
Next, the final two leaders are then voted upon by the broad party membership, with an electorate not much greater than 100,000 and highly skewed upward by age and income. Any party members with 3 months of membership or longer can vote, so expect membership to jump this week.
When it comes to candidates, ignore the bookies. Their track record for internal party politics is not great (e.g. in 2015, they had Corbyn in 3rd place AFTER polls showed him ahead). The Tory party is split in multiple ways along fiscal, foreign and social policy that it’s not obvious who can cobble together an internal majority. At a parliamentary level, MPs are most concerned about electability with a high share of marginal seats in the North and South – each with an opposite policy conclusion. Given the brand damage done by Johnson to Tories as a ‘competent’ party, we could expect the less charismatic candidates with solid policy competence to emerge as frontrunners. This would favour the likes of Sunak, Mordaunt, Hunt over Zahawi, Truss, Patel, etc.
General elections are likely to be in 2023. May 2024 would be the latest under the original schedule, but the lack of electoral mandate will be particularly stark for the new PM. The 2019 majority was very much ‘pro Boris’ so it will be hard to wait out the full electoral cycle without going back to the people. The outcome is not a foregone conclusion, even if Tories are certain to lose many seats – a majority is still plausible depending on the new PM.
In big picture terms, policy continuity will hold. The coup against Thatcher resulted in another 7 years of Thatcherism, though with a ‘human face.’ On most issues, there is no appetite for revolutionary course change. In fact, there are no big policy proposals at all…so it’s hard to imagine a new PM inventing them prior to the 2024 election.
Within constraints, there will need to be some fiscal impulse. First, the economy will likely be in outright and visible contraction by the time the new PM takes over. Second, the new PM will need to use the first budget to make some type of mark. What’s uncertain is the composition of fiscal impulse, with Sunak tilting toward tax relief that’s growth-dependent or budget-neutral versus other candidates tilting toward debt-financed tax relief. Politically, this will link back to whether party strategists see a greater threat in wealthy Southern England (challenge by the centrist Liberal Democrats) or less affluent Northern England (challenge by Labour).
Foreign policy could see the biggest change with a new PM either needing a confrontation with the EU or the opposite. The odds favour less tensions on Northern Ireland, given that Johnson’s personal predicament was a partial driver of reinvigorating Brexit stress. Euroscepticism is no longer a vote-winner in the broader population when you’re outside the EU and that should hold true for the UK too. On Ukraine, Johnson’s Churchillian instinct of hawkish support for Ukraine is likely to survive regardless of the incoming PM.
Sterling rose an average of +2.6% in the first years of the past 5 Prime Ministers. Slightly greater fiscal expansion in tandem with steeper monetary tightening should support GBP a bit, all else being equal. But ‘all else’ is not very equal these days and the macro dynamics remain perilously bad for sterling, so it will be hard to spot the PM resignation on the GBP chart below in a few weeks’ time.
Ditto for rates and borrowing costs. Change in political leadership is not significant enough to affect fundamentals.
There is a slight chance that UK equities anticipate tax relief, but the policy and politics focus will be on household relief and any corporate tax cut will likely end up being minimal.
USD/GBP: Change of Leadership Not Likely to Have Great Impact
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