How The December General Election And Escalation In US-China Trade War Is Affecting The British Economy?

  • Nov 16, 2019 GMT
  • Team Kalkine
How The December General Election And Escalation In US-China Trade War Is Affecting The British Economy?

Economic and political headwinds are not leaving much scope of growth for the UK, which has considerably impacted the sentiments of consumers, producers, and investors over there. Presently, no one is able to accurately predict for how long these headwinds are going to keep hovering over the British Economy.

Despite PM Johnson negotiated a Withdrawal deal with the EU member, he was not able to deliver Brexit on its scheduled date of October 31, 2019, which led him to invoke a general election. But the outcome of December 12, general election is also unpredictable. Many assuming Conservatives to gain an absolute majority, while some expect Labour to lead in the December general election, and many are also predicting that the general election would lead to a Hung Parliament- where no political party would have an absolute majority.

However, the ex-Prime Minister Theresa May had also tried her luck to conduct a snap election which got misfired completely. Her plan was to extend her small majority at the House of Commons to above 100 seats. On the contrary, she lost some seats to the opposition Labour party, and it made the delivery of any kind of UK’s exit from the EU bloc impossible.

Now PM Johnson is going to contest the similar snap election on December 12, 2019, as his effort wasn't enough to get consent for Brexit through the British Parliament. Despite having negotiated a deal done with the EU administrators, he doesn't have enough strength at the House of Commons to get his deal approved through the British Parliament. Going for another snap election to secure a majority at the Parliament was the only possible alternative to deliver on Brexit.

However, opinion polls survey shows that there are higher chances of PM Johnson-led Tories winning a majority at the House of Commons, which would likely bring some stability in the UK’s economy as well.

Many expect that a probable victory of PM Johnson-led government would be market-friendly and is likely to cheer investors at the Stock Exchange. As with absolute majority, Mr Johnson would be able to push through the Brexit deal that he has negotiated with the EU bloc.

Though, if the Labour gets the majority in the December 12, general election, it could be a big shock for Britain's financial markets, as Labour party's broader manifesto is comparatively radical. It wants to steer UK's Economy in the opposite direction through large-level nationalization, tax rate hikes, stringent reforms and regulations for the country's businesses.

However, a hung Parliament would also have a negative impact on the UK’s economy as it will further raise Brexit-related uncertainty and that will lead to a long-lasting political crisis in the UK, the most severe since World War II.  It will immediately dent retailing and other businesses, for whom Christmas sale is very significant.

In case of any alliance including Scottish National Party, the SNP’s elected MPs will seek for another referendum for Scotland in 2020, which could weigh on the British Pound

...And then there is escalating trade tension between the world’s two large economies

Recently, the United States President Donald Trump evoked a new trade escalation with China, commenting that US tariffs on Chinese goods would be “increased substantially” if no deal was attained with officials in China.

His comments at the Economic Club of New York indicated that the trouble the US officials is having in their effort to strike an interim deal with China that would bring pause to the trade conflict affecting two world’s largest economies.

Post US President announcement that a tentative deal had been decided in October 2019, the United States and Chinese officials have been bargaining over the details, including where a deal would be signed and whether the United States would roll back existing tariffs as a part of such a settlement.

President Trump also commented that a crucial phase I deal has been negotiated with China which was very near and could get executed soon, as China badly required this deal. But he also added that higher tariffs would follow if the talks failed.

Since trade escalation started, US initially imposed 25% tariffs on $250bn of Chinese imports and 15% tariffs on a further $112bn of Chinese imports. It also threatened new 15% tariffs on a further $156bn of Chinese goods in December.

Trump warned that if we don’t finalise a deal, we are going to raise tariffs substantially. He also added that his administration had delivered on our promises and exceeded our expectation but criticised the US Federal Reserve for hurdling growth under his watch.

Sterling pressure looks inflated

After a series of economic events took place recently ranging from the modest GDP growth rate of UK and further escalated trade tension between the US and China, Sterling has gained strength, accumulating over the past couple of months. Though, since, its one-month peak of 1.3014 against the US dollars, it has depreciated approximately 1.47% to $1.2855 in the November 15, 2019 market session.

However, the Moving Average Convergence Divergence is falling, with MACD line hovering below the 9-day Exponential Moving Average signal line. But, the 12-day EMA was still quoting above the 26-day EMA. Also, the 9-day and 14-day Relative Strength Index was hovering in a neutral zone. The lack of any trend in Sterling might lead to some profit booking, and prices could drop further.

At the time of writing (as on November 15, 2019), currency pair Pound traded 0.02% higher at $1.2879 and touched an intraday high of $1.2881 and a low of $1.2878, respectively. In the year-over period, it has witnessed large swings as its 52w high stood at 1.3385 and 52w low at 1.1959, respectively.

However, in case the PM Johnson-led conservatives get a thumping majority at the House of Commons, which would allow PM Johnson to implement an already negotiated trade deal with the EU and deliver Brexit smoothly, uncertainties would recede, lifting the Pound Sterling, guaranteeing British access to Europe on freshly negotiated terms and would boost consumer sentiment.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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