Boris Johnson has officially resigned as leader of the Conservative party, or at least he will do, when there is a new leader in place.
Then again, if you are reading this over the weekend even this could be out of date and he could either have un-resigned or have been ousted entirely. With the pace of news flying around the current incumbent of Number 10, it is impossible to know.
From an economic perspective, political uncertainty usually drags on performance as it weighs on investor sentiment and can lead to a lack of spending on research and development within businesses, but analysts are split as to whether the news creates more or less certainty.
Some suggested that the news creates more questions than answers around who will run the country, while others said it lifted a weight that will encourage investing in the market again.
While this week’s news is certainly headline worthy, however, it is largely irrelevant compared with the challenges millions of people already face: namely the cost-of-living crisis brought about by rising inflation.
Even before the political mess that has been the past few days, fund managers were suggesting a recession was likely, with Premier Miton’s David Jane noting that, in the face of higher prices, “sadly, there are no attractive policy options, the only way to fix inflation is to reduce demand, e.g. a recession”.
Silvia Dall’Angelo, senior economist at Federated Hermes, added: “Persistently high and rising cost-push inflation has eroded real incomes, which will likely result in a sharp slowdown in consumption in the second half of this year. Consumer confidence running at a record low and emerging cracks in business confidence suggest recession risks have increased for the coming quarters.”
If anything, the prime minister’s resignation makes policymakers even more hamstrung. Indeed, while Bank of England governor Andrew Bailey might continue to raise interest rates, he runs the risk of dampening out already fragile growth.
He would surely have wanted the government to support economic growth through a fiscal stimulus package – something that looks less likely now, despite Johnson’s urge to cut taxes.
“Fiscal space has been constrained following the increase in public debt that pandemic-related stimulus brought about and further blanket fiscal easing – as opposed to targeted and limited measures to support the most vulnerable households – would stoke additional inflationary pressures,” Dall’Angelo said.
So what should you do? Well if I knew the answer I would be found on a beach somewhere with my feet up and a cocktail in hand, rather than writing this column.
But it is worth remembering that the stock market isn’t the same as the UK economy – around 27% of revenues in the FTSE All Share index are sourced from the UK, with more than 70% arising from global markets, according to data from Invesco.
They said that energy and commodity markets are likely to remain stronger for longer, suggesting there are reasons to be optimistic, rather than overly pessimistic, about FTSE All Share earnings.
James Penny, chief investment officer at TAM Asset Management, meanwhile said that domestic businesses found in the mid- and small-cap space should also do well, with Johnson’s successor “likely to have a softer stance on Europe and Brexit negotiations”.
Of course, there are those that also believe the news will lead to more uncertainty in the short term. Laura Foll, UK equities portfolio manager at Janus Henderson Investors, said the “overhang of perceived additional political risk associated with UK equities is unlikely to be resolved in the very short term”, but added it could be lifted to a degree once a new leader is in place.