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A general election this year now looks inevitable, after the defection of Phillip Lee MP from the Tories to the Lib Dems, and the PM's threat to seek an election if MPs take control of the Order Paper on Tuesday evening.
The recent narrowing of the Conservatives' opinion poll lead suggests that investors, particularly in the gilt market, now must consider other parties' fiscal proposals.
Today's local elections are more important than usual, because they will enable investors to assess if the Conservatives really are on track for a landslide victory in the general election, as suggested by the opinion polls and priced-in by the forex market.
The Conservatives' opinion poll lead continued to decline over the last week, suggesting that a landslide victory on Thursday no longer is likely. Indeed, the Tories' average lead over Labour in the 10 most recent opinion polls has fallen to just 6%, down from a peak of nearly 20% a month ago.
The Conservatives' opinion poll rating has fallen dramatically over the last 10 days or so, pushing sterling down and forcing investors to confront the possibility that Theresa May might not increase her majority much from the current paltry 17 MPs.
The Conservatives are rallying in the opinion polls, as their uncompromising line on leaving the E.U. by October 31, come what may, resonates with Brexit party supporters.
The final flurry of opinion polls indicates that voting intentions have changed little over the last few days. The Conservatives have an average lead over Labour of 7.5% in the final p olls conducted by 10 different agencies, only slightly more than their 6.5% lead at the 2015 election.
The Prime Minister's refusal last week to reaffirm her party's 2015 election pledge not to raise income tax, National Insurance or VAT has fuelled speculation that taxes will rise if the Conservatives are re-elected on June 8. Admittedly, Mrs. May asserted that her party "believes in lower taxes", and the tax pledge s till might appear in the Conservatives' manifesto, which won't be published for a few weeks.
Centrist politicians and markets breathed a sigh of relief yesterday as the results of the Dutch parliamentary elections rolled in. The incumbent conservatives, led by PM Mark Rutte, lost ground but emerged as parliament's biggest party with 33 seats out of the total 150.
Elections will be held on Thursday in two constituencies vacated recently by Labour MPs. Betting markets are pricing-in a 70% chance that the Conservatives will win the by-election in Copeland--even though they trailed Labour there by eight points in the general election in 2015--mainly because around 60% of Copeland's electorate voted to leave the EU last year.
Support for the Conservatives has shown no sign of flagging in recent weeks, despite the setbacks in the Commons earlier this month and the government's failure so far to secure a revised Brexit deal.
Later today, the Chancellor likely will take the first step towards abandoning plans for further fiscal tightening. In
The latest public finance figures make it virtually inevitable that the Chancellor will scrap the existing fiscal rules when he delivers his first Budget.
Both the E.U. and the U.K. government have been keen to emphasise, since the Withdrawal Agreement was provisionally signed off, that March 29 is a hard deadline for Brexit.
We continue to expect a general election to be held in December.
One of the more disheartening aspects of the Q2 national accounts, released last week, was the downward revision to business investment. Quarteron-quarter growth was revised to -0.7%, from +0.5% previously.
We expect the second estimate of Q1 GDP, released today, to restate that quarter-on-quarter growth slowed to just 0.3%, from 0.7% in Q4. The second estimate of growth rarely is different to the first.
The pressure on Theresa May from Brexiteers within her own party intensified yesterday, when 60 Conservative MPs signed a letter arguing that they could not back a proposal for a "customs partnership".
Speculation that the U.K. will end up leaving the E.U. in March without a deal has dominated the headlines over the last month. Politicians on both sides of the Channel have warned that the probability of a no-deal Brexit is at least as high as 50%, even though more than 80% of the withdrawal deal already has been agreed.
The risk of a snap general election has jumped following Theresa May's resignation and the widespread opposition within the Conservative party to the compromises she proposed last week, which might have paved the way to a soft Brexit.
On the face of it, the latest public finance data suggest that the economy has lost momentum.
The latest public finance figures continue to imply that the Chancellor will be able to change course later this year in the Autumn Budget so that fiscal policy doesn't drag on GDP growth next year.
Public sector borrowing still is on course to greatly undershoot the March Budget forecasts this year, despite October's poor figures.
British politics remains a complete mess, with many outcomes, ranging from no-deal Brexit to revoking Article 50, possible in the second half of this year.
Sterling jumped last week to its highest level against the dollar since last October in response to news that a general election will be held on June 8. Markets are betting that the Conservative Government will sharply increase its majority, enabling Theresa May to ignore Eurosceptic backbenchers when she strikes a deal with the EU.
Theresa May doubled down on her Brexit stance last week, despite European Council President Donald Tusk stating clearly that her proposed framework for economic cooperation "will not work" because it risks undermining the single market.
Recession fears were fanned yesterday by the renewed deterioration of the Markit/CIPS services survey.
If the Chancellor is true to his word, Wednesday's Budget will be a pedestrian affair with few major policy changes designed to prevent the economy from slowing this year. In an article in The Sunday Times, Philip Hammond asserted that "we cannot take our foot off the pedal" in the mission to eliminate the budget deficit by the end of the next parliament.
Predicting which way markets would move in response to potential general election outcomes has been relatively straightforward in the past. But the usual rules of thumb will not apply when the election results filter through after polling stations close on Thursday evening.
The Chancellor will struggle to make his Spring Statement heard on March 13 over the noise of next week's key Brexit votes in parliament, likely spanning from March 12 to 14.
The Treasury has tried to dampen expectations for Tuesday's Spring Statement, which has replaced the Autumn Statement since the Budget was moved last year to November.
After last week's drama, the pace of political developments should slow down this week.
The Prime Minister has argued repeatedly during the general election campaign that Britain will prosper under a "strong and stable" Conservative government with a large majority. "Division in Westminster," she argued when calling the election last month, "...will risk our ability to make a success of Brexit and it will cause damaging uncertainty and instability to the country."
According to Shadow Chancellor John McDonnell, it is "almost inevitable" that Labour will table a no-confidence motion in the government next month, shortly after MPs return from the summer recess on September 3.
Sterling recovered to $1.23 yesterday, its highest level since late July, in response to the sharp decline in the risk of a no -deal Brexit at the end of October, triggered by MPs' actions.
We're relatively optimistic--yes, you read that correctly--on the outlook for the U.K. economy in 2019.
Investors have concluded from June's Markit/CIPS PMIs and Governor Carney's speech on Tuesday that the chance of the MPC cutting Bank Rate before the end of this year now is about 50%, rising to 55% by the time of Mr. Carney's final meeting at the end of January.
September's Markit/CIPS PMIs indicate that the economy still is stuck in a low gear.
With less than a week to go until MPs' meaningful vote on Brexit legislation, on December 11, the Prime Minister still looks set to lose.
The chances of the first phase of the Brexit saga concluding soon declined sharply last week.
The flow of downbeat business surveys continued yesterday, with the release of the Markit/CIPS construction survey.
The Chancellor's decision immediately to spend all the proceeds from the OBR's upgrade to its projections for tax receipts appears to leave his plans exposed to future adverse revisions to the economic outlook.
Investors have become more concerned about a no-deal Brexit.
The housing market appears to be emerging gradually from the coma induced by Brexit uncertainty at the start of the year.
We often hear that the large gap between the slowing rising path for interest rates anticipated by the MPC and the flat profile expected by markets is justified because markets have to price-in all of the downside risks to the economic outlook posed by Brexit.
Sterling held on to its recent gains yesterday despite mounting speculation that Eurosceptic Conservative MPs are plotting a leadership challenge.
After the first round of voting by Tory MPs, Boris Johnson remains the clear favourite to be the next Prime Minister.
Sterling weakened yesterday, to $1.31 from $1.32, following news that 40 Conservative MPs have agreed to sign a letter of no-confidence in the Prime Minister.
Speculators who have sold sterling over the last six months have been frustrated. Investors have been overwhelmingly net short sterling, but the pound has hovered between $1.20 and $1.25, as our first chart shows. Undeterred, investors increased their net short positions last week to 107K contracts-- the most since records began in 1992--from 81K a week earlier.
The E.U.'s decision to grant the U.K. a Brexit extension until October 31 does not extinguish the possibility that the MPC will raise Bank Rate before the end of the year.
A cursory glance at July's labour market report gives no cause for alarm. The headline, three-month average, unemployment rate returned to 3.8% in July, after edging up to 3.9% in June.
The Prime Minister is in a position on Brexit all chess players dread: zugzwang.
Promises of new money to facilitate construction on public sector land from the Chancellor and the pick-up in the construction PMI have fostered optimism that the sector's downturn is over.
Sterling fell to $1.38, from $1.39, in the hour following the EU's publication of a draft Article 50 withdrawal treaty, which set out the practical consequences of the principles the U.K. agreed to in December.
Unsurprisingly, cross-party Brexit talks are not going well.
The government remains on course to lose next Tuesday's Commons vote on the Withdrawal Agreement--WA--by a huge margin.
Sterling leapt to $1.27, from $1.22 last week, amid some positive signals from all sides engaged in Brexit talks.
The Chancellor kept his word and made only trivial policy changes in the Spring Statement, but he hinted at higher spending plans in the Autumn Budget.
We are pushing back our forecast for the next rise in Bank Rate to May 2020, from the tail-end of this year.
The RICS Residential Market Survey caught our eye last week for reporting that new sale instructions to estate agents rose in May for the first month since February 2016.
The vote in the House of Commons today on whether MPs should effectively take control of Brexit negotiations, if Theresa May can't strike a deal by mid-January, looks finely balanced.
As we write, 25 Conservative MPs have confirmed publicly that they have submitted no-confidence letters to the Chairman of the 1922 Committee. That's 23 short of the 48 required to trigger a leadership contest, though some MPs might have submitted letters without making it public.
Signs that the government is softening its Brexit plans, in response to its substantial defeat in the Commons last week, has enabled sterling to recover most of the ground lost against the dollar and euro in the fourth quarter of last year.
The decision by seven MPs to abandon Labour and set up a new centrist grouping--the Independent Group--will not have a significant impact on the outcome of parliamentary Brexit votes.
Sterling continued to recover last week, hitting its highest level against the dollar since October, despite a series of data releases indicating that the economy is losing momentum. Indeed, sterling was unscathed by the news on Friday that quarter-on-quarter GDP growth slowed to just 0.3% in Q1, from 0.7% in Q4.
We look for yet another unanimous vote by the MPC to keep Bank Rate at 0.75% on Thursday, with no new guidance on the near-term outlook.
Prime Minister Theresa May's announcement that Parliament will vote today on holding a general election on June 8 shocked markets and even her own party's MPs. Betting markets were pricing in only a 20% chance of a 2017 election before yesterday's news.
Former Chancellor George Osborne famously quipped after last year's general election that Theresa May was "a dead woman walking and the only question is how long she remains on death row".
Even if the Prime Minister fends off an emerging leadership challenge--as we write, the rebels still are short of the 48 signatures required to trigger a confidence vote--her chances of getting parliament to back the Withdrawal Agreement in its current form are slim.
Our forecast that CPI inflation will return to the 2% target by the end of 2018 sets us apart from the MPC and consensus, which expect a more modest decline, to 2.4%.
Reforms to Stamp Duty Land Tax paid by first-time buyers likely will take centre stage in the Budget. At the Conservatives' party conference, Theresa May pledged another £10B to expand the Help to Buy Scheme, which helps first-time buyers obtain a mortgage which just a 5% deposit.
It's now four weeks since the Prime Minister called a snap general election, and the Conservatives still are riding high in the opinion polls. The average of the last 10 polls suggests that the Tories are on track to take 47% of the vote, well above Labour's 30%.
Samuel Tombs has more than a decade of experience covering the U.K. economy for investors. At Pantheon, Samuel's research is rigorous, free of dogma and jargon, and unafraid to challenge consensus views. His work focuses on what matters to professional investors: The links between the real economy, monetary policy and asset prices. He has a strong track record of getting the big calls right. The Sunday Times ranked Samuel as the most accurate forecaster of the U.K. economy in both 2014 and 2018. In addition, Bloomberg consistently has ranked Samuel as one of the top three U.K. forecasters, out of pool of 35 economists, throughout 2018 and 2019. His in-depth knowledge of market-moving data and his forensic forecasting approach explain why he consistently beats the consensus. Samuel's work on Brexit goes beyond simply reporting developments and is always analytical and unbiased, enabling investors to see through the noise of the daily headlines. While his analysis points to a particular path that politicians will take, he acknowledges the inherent uncertainty and draws out the economic and financial market implications of all plausible Brexit scenarios. Samuel holds an MSc in Economics from Birkbeck College, University of London and an undergraduate degree in History and Economics from the University of Oxford. Prior to joining Pantheon in 2015, he was Senior U.K. Economist at Capital Economics. In 2011, Samuel won the Society of Business Economists' prestigious Rybczynski Prize for an article on quantitative easing in the UK. He is based in London but frequently visits our other offices. Recent key calls include: 2018 - Correctly forecast that GDP growth would slow and inflation would undershoot the MPC's initial forecast, prompting the Committee to shock investors and almost other economists by waiting until August to raise Bank Rate, rather than pressing ahead in May. 2017 - Argued that the MPC was wrong to expect CPI inflation to stay below 3% following sterling's depreciation. He also highlighted that economic indicators pointed to the Conservatives losing their outright majority in the snap general election.
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