Hung Parliament

Looking Through Britain's Election Chaos

An uneasy equilibrium is holding as a hung parliament looms.
Photographer: BEN STANSALL/AFP/Getty Images

On the face of it, the British election result should be bad news for U.K. financial markets. With no party winning sufficient seats to form a majority government, domestic political chaos is all but assured. Offsetting that, though, is the prospect that the Brexit negotiations may result in a less economically damaging departure than previously expected.

That helps explain why the pound is holding its ground, after taking an initial tumble when exit polls first signaled the likelihood of a hung parliament. It took another downward turn after the BBC reported that Theresa May won't resign as Conservative leader.

Damage Limitation

Source: Bloomberg

The election result leaves the leadership of the country in limbo, with the Conservative Party shy of the number of seats it needs to form a majority government. But it has stoked expectations that whoever ends up in charge will abandon the so-called hard Brexit strategy that May's administration was pursuing.

That, in turn, may limit the economic impact of leaving the European Union. The U.K. is currently the worst-performing member of the bloc, with gross domestic product in the first quarter lagging every one of its peers.

Bottom of the Class

The U.K. has the worst quarter-on-quarter growth rate in the European Union for the first three months of 2017

Source: Eurostat

Note: Figures for Ireland, Luxembourg and Malta are for fourth quarter (first-quarter data not yet available)

So in the immediate aftermath of the election, the pound finds itself performing a balancing act between the pessimism of a muddy outcome and the optimism of a softer Brexit. It's an uneasy equilibrium; but for now at least, the truce in U.K. financial markets is holding.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Mark Gilbert in London at

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    Edward Evans at

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