Boris at the business end of Brexit journey

The election result brings certainty for the public and politicians, but not corporates.

Prime Minister Boris Johnson gives a speech on stage after retaining his seat of Uxbridge and Ruislip South. Picture: AFP

Boris Johnson’s thumping victory will boost confidence and strengthen Britain’s hand in forthcoming trade negotiations with the European Union, but economic challenges remain.

After more than three fractious years, households in the world’s fifth-largest economy now have certainty Britain will be leaving the continental trade bloc, which it has been a member of since 1972, by January 31.

But for businesses, uncertainty levels haven’t plummeted. The Brexit debate will retreat from page one to page 6 of the newspapers, but for a company like Airbus, for example, a European industrial champion jointly owned by France, Germany and the UK that manufactures wings in Britain, clarity is years away. The same can be said for the Japanese and Euro car manufacturers that have long based production in the UK.

In a pre-election bid to appear determined, Johnson said he wanted the trade deal with the EU sorted by the end of next year, rather than 2021, leaving 11 months to negotiate a deal. That’s a short time period for two sophisticated large economies, and the EU is likely to say it can only finalise a deal so fast on terms favourable to it.

The share of British exports going to the EU has been shrinking, from 55 per cent in 2006 to 44 per cent in 2017, but maintaining trade on good terms is critical to British jobs. The EU knows that.

Peter Flavel, chief executive of Coutts bank, said Britain would remain sharply divided about Brexit after the election. “But I don’t think it will be the end of the world. It will be difficult for a period of time but the things that make the UK great will remain,” he told The Weekend Australian.

Flavel, an Australian, said a UK outside the EU would “definitely” expand its trade with Australia and New Zealand. “It’s helpful, but obviously they are much smaller markets than the EU. We’ll find the UK reconnecting with the Commonwealth countries, but also with other markets, including Asia,” he said.

On trade, a big unknown will be Donald Trump’s attitude. The US President’s public support for Johnson and Britain’s exit from the EU might not be matched by a friendly negotiating stance in forthcoming trade negotiations between the US and the UK.

Indeed, whatever the President’s attachment to Britain, a prospective US-EU free-trade deal, known as the Trans-Atlantic Trade and Investment Partnership, offers great benefits to US business.

Short-term, the Conservative win is a shot in the arm for confidence. The pound, kneecapped in the wake of the 2016 referendum, surged by 2.5 per cent after the blockbuster exit poll was revealed on Thursday night London time, trading at its strongest level against the US dollar since June 2018. British blue-chip shares typically fall when the pound appreciates — because such a big chunk of listed UK firms’ earnings are derived from other markets — but they will almost certainly jump in the next few days in the afterglow of the Tory victory.

Once the excitement of slightly higher asset prices passes, the reality of anaemic growth will remain. Three years of intense focus on foreign policy has seen domestic economic policy neglected. Economic growth in Britain has been as weak as Australia’s — around 1.5 per cent a year with little forecast for improvement.

Flavel, in optimistic news, said his bank had enjoyed “very strong” lending growth, in both business and households, in recent months.

“We bank with influential and successful entrepreneurs and they are continuing to grow in the UK,” he said.

Economists at JP Morgan said business investment had failed to respond to ultra low interest rates. It’s up to 15 per cent below where it should be given the level of interest rates.

The Conservatives have promised to increase spending significantly on infrastructure and public services, which is expected to lift economic growth by a not insignificant 0.5 percentage points a year in 2020.

But without increases in tax UK government debt, stable at a 85 per cent share of GDP, will start to rise again. Other headwinds in the medium term include slower immigration, which has helped underpin the British economy. The Conservatives have promised to reduce it significantly using an “Australian-based points system”.

The Chancellor of the Exchequer, Sajid Javid, has suggested a “deal dividend” awaits the economy, citing recent Goldman Sachs research that found around £150bn of foreign investment was waiting for a Conservative victory.

Finally, the transformation of the Conservative party into a workers’ party will affect policy too. This week’s win brings scores of working-class northern seats into the Conservative orbit, reflecting the realignment of British politics away from class lines to one of values.

The Tory party will want to hold these seats, meaning investors shouldn’t count on traditional Tory policies in the lead-up to the next election.

The British Treasury’s forecasts before the 2016 referendum have proved very wrong. It claimed a Brexit vote would sap Britain’s GDP by 3.6 per cent and lift unemployment by about 500,000.

In fact, economic growth has accelerated, and the unemployment rate has fallen below 4 per cent, the lowest since the 1970s. Its longer-term forecasts, also pointing to a significantly worse economic situation due to Brexit, haven’t been proved wrong yet, however.