A landslide Conservative victory in Britain’s Brexit election and a potential trade deal between the US and China have delivered a double helping of good news for the global economy.
UK voters handed Prime Minister Boris Johnson a handsome victory and a clear mandate to get Brexit done.
“At this stage, it does look as though this one-nation Conservative government has been given a powerful new mandate to get Brexit done, and not just to get Brexit done but to unite this country and to take it forward,” Mr Johnson said after winning his west London seat of Uxbridge.
“I think this will turn out to be a historic election that gives us now, in this new government, the chance to respect the democratic will of the British people, to change this country for the better and to unleash the potential of the entire people of this country.”
In Australia, Trade Minister Simon Birmingham said formal trade negotiations could begin as soon as Brexit, which is scheduled for January 31, is delivered.
“Australia stands ready to shift into formal negotiations towards an Australia-UK Free Trade Agreement and we would look to conclude a deal as quickly as possible,” said Senator Birmingham.
The emphatic victory and easing trade tensions buoyed markets around the world, and were seen as a reason for the Reserve Bank of Australia to arrest its rate cut cycle.
“The clear result is positive for a reduction in global political uncertainty, especially with news of a breakthrough on trade,” said Tony Morriss, head of Australian economics at Bank of America Merrill Lynch.
The US and China have reportedly agreed on a “deal in principle” over trade. That could bring a reduction in existing tariffs and counter anxiety over another tariff hike on Chinese goods imported into the US that was set to take place as soon as Sunday.
“We regard these developments as a material positive for global markets and global sentiment,” said Andrew Ticehurst, senior economist at Nomura Securities, noting that there had been a strong expectation in markets that the Conservatives would win the UK election.
“We are inclined to think that [these developments] could give the Reserve Bank of Australia reason to pause on interest rate cuts,” he added, given the expected effect on the global economy.
Markets have assigned a roughly 60 per cent chance to another rate cut from the RBA in February, taking the cash rate to a fresh record low of 0.5 per cent.
Mr Morriss said that the Conservative victory represented “popular support for a resolution on Brexit” and a repudiation of Labour leader Jeremy Corbyn and his far-left agenda.
As the Conservatives closed in on victory, Mr Corbyn said it had been a “disappointing night” and he would not lead Labour to the next election.
Shadow chancellor John McDonnell told the BBC he was “deeply, deeply depressed”. But he said the result was about voters wanting to see Brexit delivered rather than a rejection of his party’s radical policies.
“Brexit did dominate this election,” he said. “People wanted to get Brexit over and done with.”
Prime Minister Boris Johnson had pledged ahead of the election to “get Brexit done” and, with a Conservative victory, the country is set to leave the European Union by the end of January.
The sterling rallied sharply after early signs of a thumping Conservative win, with the British pound surging nearly 3 per cent immediately after exit polls indicated the scale of Mr Johnson’s victory.
UK-exposed stocks climbed in the Australian trading session – Virgin Money UK (formerly known as CYBG) and wealth platform provider Bravura surged, leading the ASX to a 0.5 per cent gain in the session.
The British result could also be an early signpost for the US election next November. Donald Trump may take heart from the pro-conservative result and the rejection of the sort of redistributionist policies being favoured by some of his Democrat rivals.
Mr Trump can point to a robust US economy as he sets out his case for leadership. The latest monthly non-farm payrolls data exceeded economist expectations and painted a strong picture of the US labour market.
“America is working, these are very strong numbers,” Larry Kudlow, the White House’s economic adviser, told CNBC this week. “I’m thinking you’re going to see a capex, business investment follow-through.”
Low unemployment and moderate growth next year was the message telegraphed by the US Federal Reserve this week, with interest rates expected to stay at current levels.
The US economy has been rolling along even as the US engages in a tit-for-tat trade war with its closest economic rival, China.
Since the second quarter of 2018, the countries have been locked in a battle over trade, each slugging the other with successively higher demands.
The news of a “deal in principle” between the economic superpowers emerged just days before the US was set to slap a new round of tariffs on Chinese goods.
A trade deal would be positive for Chinese growth and regional Asia, said Mr Ticehurst at Nomura. “Trade has hit global business sentiment and investment for at least a year.”
Still, Perpetual Investments’ head of investment strategy for multi-asset, Matthew Sherwood, cautioned that “there are still details to be sorted out. It’s as much of a truce as anything.”
“There are a lot of tariffs to unwind and President Trump has a habit of one step forward and three steps back,” he said. Signs of a trade deal were a “step in the right direction, but the gains will be measured in inches and feet, not miles”.
Despite the positive news about US-China trade, the International Monetary Fund warned on Friday that Australia was still vulnerable to the risk of a faster slowdown in China as authorities there switched their stimulus from commodity-intensive infrastructure towards stimulating consumption.
“On the external side, Australia is especially exposed to a deeper-than-expected downturn in China through exports of commodities and services,” the IMF said in its annual assessment of the Australian economy.
“A renewed escalation of US-China trade tensions could further impair global business sentiment, discouraging investment in Australia.”