UK: JOHNSON RESIGNS – WHAT HAPPENS NOW?
Populist Prime Minister (PM) Boris Johnson has finally realised that the music has stopped. On the steps of 10 Downing Street this morning, Johnson announced that he would resign as PM and leader of the Conservative Party.
A Conservative leadership election is likely to begin within days. While his resignation adds to near-term uncertainty, looking further out, the UK economy and its financial markets look set to benefit from more stable leadership. The FTSE is up 1.20% at the time of writing.
All eyes on the Conservative leadership contest
The leadership race will be decided according to the election rules of the Conservative Party – this is not a matter for parliament. The election has two stages: first, would-be leaders among Conservative MPs put their names forward and are whittled down in a series of votes among MPs until two remain; second, the party membership decides who of the two will lead. The 1922 Committee, which is the parliamentary party of all backbench Conservative MPs, will decide the timeline of key votes.
I believe Johnson has become such a toxic asset to the Conservatives – and could be a continued liability during any caretaker period – that the party’s MPs may strive to agree a new leader among themselves. The process need not end with a final vote by all party members. In 2016, Theresa May became leader after only two rounds of votes in the first stage. After winning 60% support of MPs, the other candidates dropped out of the race. The process in 2016 lasted less than two weeks – from 29 June to 11 July. In 2019, when Johnson won in the second stage, after five ballots in stage one, the process took some seven weeks – from 7 June to 23 July. With any luck, the UK will have a new PM before parliament goes into summer recess on 21 July. Otherwise, Johnson may remain in No 10 Downing Street until parliament rises on 5 September.
Better days potentially ahead for sterling?
Judging by the early line-up of potential successors to Johnson (see chart below), the balance of possible outcomes could tilt towards less strained relations with the European Union (EU). Even the ardent Brexiteer candidates (Mordaunt and Truss) are less of the populist variety than Johnson. This may suggest that, while it is unclear whether UK-EU relations would improve a bit or a lot, the overall situation stands to be much calmer.
Over time, less fraught and uncertain UK-EU relations may prove to be the catalyst for stronger business investment and a sustained appreciation in sterling towards fair value against the dollar (c1.40-1.45) and the euro (1.20-1.25). Looking further out, a Conservative leadership election followed by a snap election during the new leader’s honeymoon phase is not unthinkable for late-2022 or early-2023. Both Johnson and May took the UK to the polls soon after becoming Conservative leader in order to cement their positions.
UK betting market candidates implied to become next UK Prime Minister (%)
Implied probabilities based on best odds from oddschecker, 12pm London time on 7 July. Source: oddschecker, Berenberg calculations
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