What happens now
Johnson’s resignation triggers a Conservative Party leadership contest. Normally, the Prime Minister remains in place during such a contest until a new leader is elected, maintaining all his or her normal Prime Ministerial powers.2 Two recent examples include Johnson’s predecessor Theresa May in 2019 and David Cameron in 2016.
If Johnson decides to leave before a new leader is elected, he can recommend the Queen appoints someone else to take over as caretaker PM until a new leader is elected. In April 2020, Deputy PM Dominic Raab was asked to stand in for Johnson when the PM was admitted to hospital due to a Covid-19 infection, so it is possible that he would be proposed if Johnson were to go immediately
Regardless of who takes over, the likelihood of a new general election is low. The Conservative Party gained 44% of the popular vote at the last election, achieving a majority of 80 seats in the House of Commons. This is something the Party will not want to risk by calling a snap election after the next PM is elected. A recent poll of polls gathered by Politico shows Labour leading the Conservatives in voting intentions by 40% of the vote to 33%.3
According to the latest betting odds, former Chancellor Rishi Sunak and Defence Secretary Ben Wallace have the highest chances of becoming the next Conservative Party leader with odds of 16% and 14% respectively. Trade Minister Penny Mordaunt and Foreign Secretary Liz Truss have odds of 12.5% and 8% respectively.4 Other names proposed have been Attorney General Suella Braverman, Sajid Javid and Jeremy Hunt.
Market implications
The rising cost of living in the UK has weighed on economic sentiment and encouraged the government to implement a series of measures to help offset increases in energy prices. The Government’s increase in the threshold at which people start paying National Insurance will represent a tax cut for 70% of UK workers which will save workers up to £330 a year, providing support for lower-income households.5 More general tax cuts, such as to VAT, would further help to ease pressure on consumers.
The British pound hit a two-year low against the US dollar on Wednesday 6 July, trading at 1.1875 following the wave of resignations and compounding what has already been a weak year for the currency. However, recent weakness of the pound can be attributed to broader economic concerns over a potential recession in the UK rather than to political events. The UK pound is now near lows not seen since the 1980s.
Interest rates in the UK will continue to rise, as strongly suggested by the latest statements from the Bank of England. The Monetary Policy Committee is expected to hike rates by 25bps at the next policy meeting on 4 August, but a faster hiking pace is possible if inflationary pressures remain strong.
Conclusion
Political pressures have finally pushed Boris Johnson to resign. The next PM will have the difficult task of leading the Conservative Party through an internal political crisis that will not be easy to resolve. In addition to this, the country is facing several risks and challenges with which the newcomer will have to face. On the external front the next PM will need to deal with the new Brexit arrangements, the situation in Northern Ireland, a geopolitical crisis with Russia and the impact this could have on energy prices and supply to the UK.
Domestically, it is still uncertain how Johnson’s resignation will affect the Conservative Party across the UK. Recent local elections have confirmed the loss of support in key constituencies. In addition to this, recessionary risks have been rising for the UK economy.
Johnson took over as PM with the goal of delivering Brexit. Unexpectedly he also had to deal with the UK’s response to a global pandemic and the aftermath of a severe economic crisis. During his term, he benefited from having a large majority in Parliament, something both his predecessors did not have, which allowed him to pass all the legislation needed without the need to negotiate. As public support has faded, due to his own wrongdoings, so too has that from his own party.
The UK equity markets have been resilient to the increase in domestic political uncertainty and the prospects of lower economic growth. The FTSE100 index is down by 3.7% on a year-to-date basis, outperforming other developed equity markets in 2022. However, this can be attributed to the composition of the index, where companies derive over 70% of their revenue from overseas which has been boosted by a weak exchange rate. If the new PM manages to restore credibility in the government, its ability to restore economic growth and negotiate a solution with the EU, we expect the pound to strengthen from current values against the US dollar.
1 Officially Her Majesty the Queen appoints the Prime Minister
2 Institute for Government
3 http://go.pardot.com/e/931253/-poll-of-polls-united-kingdom-/yln8/75375904?h=jIBu6GGDohQFc3oCw7xzeVr_ZuFJX6tfkC1X6q-uzRw
4 http://go.pardot.com/e/931253/2022-07-08/ylnc/75375904?h=jIBu6GGDohQFc3oCw7xzeVr_ZuFJX6tfkC1X6q-uzRw
5 http://go.pardot.com/e/931253/omes-in-for-30-million-workers/ylng/75375904?h=jIBu6GGDohQFc3oCw7xzeVr_ZuFJX6tfkC1X6q-uzRw
