Prime Minister Boris Johnson now has the majority to deliver on his promise to "unleash a great tide of investment" with his Brexit deal set to clear a previously deadlocked parliament at the end of January, but uncertainty over future trade terms remain.
His campaign promise to "get Brexit done" saw him sweep to victory with the biggest majority for the Conservative Party since Margaret Thatcher won in 1987. Labour, in contrast, crashed to its worst defeat since 1935. Johnson's aim now is to take Britain out of the European Union at the end of next month and then complete negotiations and ratification of a new trade deal by this time next year.
The margin of the Conservative majority — 78 with one seat to declare at midmorning — is significant, said Dean Turner, economist at UBS Wealth Management.
"I would not underestimate the importance of this result. It is the first time in a decade that we have a government in power with a sufficiently large majority to pass its own agenda. We are in a situation where there will be a lot of certainty and that policy clarity is worth something in terms of confidence in the economy," he said.
Sajid Javid, who is set to remain as chancellor of the Exchequer, has promised the biggest spending increase in 15 years, pledging a £13.8 billion rise in spending across all departments by 2021 though there were suggestions on Friday that the rise could be greater, up to £20 billion.
A Queen's Speech, laying out the new government's agenda, will take place on Thursday, Dec. 19.
However, private sector investment could be more restrained as long as the future shape of a trade deal with the EU was unclear, said Henry Cook, an economist at MUFG.
"There is scope for higher business investment but I do not expect an investment boom," he said.
Any investment will start from a weak base as Britain's economy grew at its slowest annual pace in nearly eight years in October with GDP up 0.7% compared with a year earlier.
There is still uncertainty about the transition arrangements and the shape of the final deal to be struck between the U.K. and the EU. Johnson has ruled out asking Brussels to extend a transition period if a deal on future trade ties has not been agreed by the end of 2020, though UBS said the likelihood of him extending the transition period if a deal was within reach was high.
However, Michel Barnier, the EU's chief negotiator, has said talks could take three years.
Britain will remain inside the EU's single market and customs union until the end of next year unless the government and the EU decide before July 1 to extend the transition for another one or two years.
Room to maneuver
The strength of the Tory victory gives Johnson more room for maneuver within his own party since he will be less beholden than previously on the support of a hardcore of Brexit-supporting MPs, some of whom wanted the U.K. to quit the EU without a deal at all.
"He now has scope to tweak his agenda, to make the [EU deal] a bit softer," said UBS' Turner.
A softer Brexit would see the U.K. remaining more closely aligned to EU rules after leaving the bloc.
"There is a clear choice, there is no longer any hesitation, the U.K. is leaving the EU," said Turner. "If the EU chooses to adopt a stance of making it difficult to strike a free trade agreement then they run the risk that that would push the U.K. away so there should be scope for compromise. Economically, though, there are no winners from Brexit; going forward it is going to be an exercise in damage limitation."
Leaving the EU under Boris Johnson's preferred deal would result in the economy being smaller by around 2% on average over the next Parliament and by 3%-4% in the long run by 2030, said the National Institute of Economic and Social Research.
UK-US trade deal
The U.S. should be first on the list of future trade deals after the EU given it accounted for 16.2% of total British exports in the 12 months to Oct. 31, said Chris Rogers, a senior researcher at Panjiva, a division of S&P Global Market Intelligence.
"A major justification for the Conservative Party's Brexit policy is to pursue non-EU free trade deals," said Rogers. "That will be particularly important for products where there is a significant exposure to non-EU exports."
The Confederation of British Industry warned that business needed early reassurance on the negotiation of the planned free trade arrangement.
"Firms will continue to do all they can to prepare for Brexit, but will want to know they won't face another no-deal cliff-edge next year," said Carolyn Fairbairn, the director-general of the CBI.
Oxford Economics' analysis of the parties' manifestos found that with a Tory win there would have very little impact on economic growth – the level of GDP would be just 0.2 percentage point higher at the end of the parliament than under existing government plans. Since the Tories' manifesto costings leave capital spending below the 3% of GDP limit specified in their proposed fiscal rules, the scope exists for a stronger GDP outcome by further increasing investment, said Oxford Economics.
"There might be a slight improvement in growth but not enough to reverse some of the leading indicators, like the Purchasing Managers' Index," said John Wraith, UBS' head of U.K. rates strategy.
"This is buying a bit of time for the Bank but it will be a short-lived anemic improvement. We still say a cut by the Bank of England in interest rates in May could still be necessary because inflation is slowing especially because of the appreciation in sterling the last six months."
The Tories' manifesto pledged to cut four key business taxes: The business rate, R&D tax, construction tax and employers' national insurance contributions. Corporation tax will remain at 19% with a planned 2% cut shelved to raise £6 billion for the National Health Service. The Tories have also promised a triple tax lock so that the rates of the three biggest taxes — National Insurance, income tax and value-added tax — will not rise.