UBS: Britain's hung parliament could spell even more trouble for the economy

LONDON — The hung parliament emerging from 2017’s general election could make things worse for the British economy than they already are, analysts from UBS wrote early on Friday morning.

In a note circulated to clients, UBS strategist John Wraith and his team argue that the uncertainty surrounding the makeup of the UK’s next government will lower the confidence of investors, particularly those investing from overseas, possibly adding to the economy’s woes.

Weakening confidence in the economy could further lower GDP growth in the coming months, the investment bank says.

“We think this result intensifies the downside risks to the near-term economic outlook. Such significant political uncertainty will further dampen sentiment and confidence,” Wraith’s team writes.

This, UBS adds, will exacerbate “the weakness we have already been starting to see over recent months.” In Friday’s election reaction note, Wraith says: “Short end rates are likely to decline, while at the longer end a renewed safe haven bid will be offset by concerns about a loss of demand from overseas investors alarmed by the political uncertainty that could persist for a prolonged period of time.”

After close to 10 months of shockingly strong growth, recent data has confirmed what economists have been predicting for a long time — that Brexit will have a materially negative impact on the British economy. GDP growth slowed to just 0.2% in the first quarter of 2017, the Office for National Statistics said late in May.

In a separate note on Thursday, Wraith predicted a “persistent and protracted” slowdown in the UK as: “In the background various gauges of confidence and sentiment are continuing to gradually soften.”

This could get even worse if overseas investors potentially delay pumping money into the country as they wait to see how the UK’s political situation develops. As it stands, the most likely outcome for a future government seems to be a Conservative-led parliament, propped up by Northern Irish parties the DUP and UUP, although the Tories could also seek to govern with a minority.

Adding to the uncertainty is the possibility of a new prime minister should Theresa May decide to (or be forced to) resign from the office after what is a humiliation for the PM.

Everything is up in the air right now, and that does not bode well for the economy.

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