After the election, 'Global Britain' is going local
Asia may have to wait some time for new trade deals with London
British politicians and citizens are trying to figure out the consequences of Prime Minister Theresa May's humiliation in an election she called to strengthen her mandate to negotiate Brexit. She campaigned very little on Brexit itself but rather on her own role, promising to lead "Global Britain" into a golden future. Instead, May's political authority and credibility now lie in ruins, her hardline Brexit stance is in tatters, and any global aspirations the government once harbored have been devoured by persistent local and parochial concerns that are likely to endure.
The general consensus is that May will be replaced by her own party sooner or later, adding to high levels of uncertainty that will linger for some time over parliament and the U.K. economy.
If Asia, among other regions, was expecting the election to hasten Brexit and drive a commercial and diplomatic British "pivot" toward the region, it is time for a rethink and not to expect any such thing to happen any time soon.
The political situation in the U.K. is fluid. While many predictions abound, none can be made with certainty. For the moment, May is prime minister and head of a minority government that is seeking support from 10 Northern Irish Protestant members of parliament to give the government a wafer-thin majority.
But the pact with the Ulster party may not last. The strengthened opposition Labour party might try to form a minority government at some stage. It is very likely there will be a new election, if not this year, then in 2018. A more radical left-wing Labour party might beat the Conservatives next time, but it is bedevilled by its own sharp left-right divisions and an ambiguous and confused stance on Brexit.
Against this uncertain backdrop, Brexit negotiations are scheduled to start on June 19. But the government's position for a hard Brexit, which means completely leaving the single market, customs union and jurisdiction of the European Court of Justice, has been dealt a blow by the election. Unprepared for Brexit and now in turmoil, the government's negotiation stance with the EU is unclear. The Conservative party needs to decide how to face down its own hard Brexit lawmakers and how to build a new consensus for an approach that might command support from other parties.
At the same time, it has to embrace serious negotiations with the EU, arrange for a lot of enabling legislation related to Brexit, manage the economy and restore its own confidence and cohesion. Without a parliamentary majority, these comprise Herculean tasks and will test the Conservative party's nerve and capacity for government.
Economic troubles ahead
No political leaders can ignore the economy, which expanded by just 0.2% from the previous quarter, and 2% from a year ago. The annual growth rate is set to slow down sharply. It is most unlikely that the U.K. will match the high quarterly growth rates recorded during 2016, and so gross domestic product growth could easily slide to around 1.3%-1.4% by the end of 2017 and 1% in 2018.
Capital spending has been disappointing, showing little change in the overall level for about a year. Consumer spending looks quite stretched because inflation is eating away at sluggish incomes while the savings rate has fallen close to an all-time low. In other words, borrowing by households has maxed out. Political uncertainty is more likely to erode business and household confidence and delay important economic policies that might strengthen the U.K. economy's supply-side potential in the medium-term.
In May, the U.K. Chancellor of the Exchequer, Philip Hammond, flew to Beijing in the middle of the election campaign to attend China's Belt and Road Forum. He told the audience of 1,500 that the U.K. was a natural partner for China's new $1 trillion Silk Road program. He emphasized that with the U.K. leaving the EU, it would pursue ambitious free trade agreements with the rest of the world. The implication was that Asia would be high on London's priority list.
But a Britain that is consumed by political uncertainty and the enormity and complexity of Brexit is not about to become self-confident and assertive in its search for foreign partners. The Brexit process will be time consuming and perhaps fractious. If disunity and indecision prevail, the U.K. could end up with a hard Brexit anyway as it leaves the EU without agreement on the nature of a new relationship.
At the other extreme, Brexit may become a sort of mirage, always close but just out of reach. Or there may be a second referendum or a new election to decide the issue. Previously rejected compromises that might allow the U.K. to retain stronger economic and trading links to the EU by joining the European Economic Area could also resurface.
It is this new and politically unsettling background that is going to preoccupy politicians, businesses, households and markets for the foreseeable future. It did not seem plausible that the government's "Global Britain" image was going to match the hype before the election and it is less so today.
From an Asian perspective, Britain's will and capacity to develop deeper business and diplomatic relations may come into their own again, but right now, it is local Britain and little more than that.
George Magnus is an associate at Oxford University's China Centre and former chief economist at UBS.