UK Watch
Group Economics Macro & Financial Markets Research Nick Kounis +31 20 343 5616
No party will win majority
6 May 2015 • • • • •
No party will win a majority in our view Based on the current polling a workable coalition government is unlikely There is a distinct possibility that there will be a second election No workable majority or a Labour minority government would be negative for sterling… …while a Conservatives’ majority with LibDems and DUP would be positive for UK assets
Who is going to win?
rely largely on spending cuts, while Labour relies on a mix of
No party will win a majority. There are 650 seats in the UK
cuts and tax hikes. Finally, the Conservatives would hold a
parliament and 326 seats are needed for a majority (though a
referendum on whether the UK should stay in the EU by 2017.
party may be able to get away with 323). Polling suggests that
The DUP is also in favour of a referendum, though the
the Conservative party will be the largest, with around 280
LibDems are against.
seats. Labour would come second, with around 270 seats. What does all this mean for UK assets? Is a workable coalition government possible?
Any sign that there would be no workable majority or a Labour
Not on current polling. The Conservatives could potentially
minority government would be a significant negative for
form a coalition with the Liberal Democrats (25 seats) and the
sterling, gilts and UK equities. Signs that the Conservatives
Democratic Unionist party of Northern Ireland (9 seats).
could scrape a majority with the LibDems and DUP would be
However, current polling leaves them short of the numbers
positive for UK assets. On the other hand, in the long term, an
needed. The Conservatives would need to beat expectations
in-out referendum would be a negative for UK assets. Though
and reach 290 seats to make such a coalition possible.
this will not be front of mind for investors until the date is closer.
Meanwhile, Labour could in terms of numbers form a coalition government with the Scottish Nationalist Party (around 55
Calculated effective exchange rate UK
seats). However, it has ruled this or any other arrangement
Index
out. This would leave it as a minority government relying on
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the SNP to support it vote by vote with no formal agreement. This would be a rather unstable form of government, and might
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not last long. 90
Will there be a second election? This is a distinct possibility given the difficulty of forming a
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stable (coalition) government on current polling. The last time this scenario was seen was in 1974. This could prolong the uncertainty until the autumn as the summer might not be seen
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as a good time for a new election given holidays. Whether a second election would lead to a different result is unclear. Some commentators point out that the Conservatives are the only party with the budget to fight a second election with the same effort as they did the first. What are the differences in economic policy? There are three key differences. First, the pace of fiscal consolidation would be faster under the Conservatives. We estimate fiscal tightening of almost 5% GDP compared to a little over 3% under Labour over the next parliament. However, both have black holes in their fiscal plans, suggesting actual outcomes could be very different. Second, the Conservatives
Source: Bloomberg, BoE
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