What a night for the Conservative party. They out-polled all the predictions and will be staying in Downing Street to govern on their own, thanks to the small majority they look likely to achieve. Comparisons with 1992 seem valid: David Cameron is the New John Major, the man who confounded the pollsters!
For the markets, the election was the dog that didn't bark. Short-term uncertainty has been avoided and growth headwinds caused by electoral uncertainty have abated. Equities have rallied somewhat, and the pound has bounced. Looking further ahead, the markets seem unlikely to push these moves too much further. The likelihood of a fresh round of austerity probably means less growth and a different policy mix than seemed likely only yesterday. Slower growth may dampen equity market enthusiasm, while less upwards pressure on interest rates could keep a lid on sterling.
Politically, there remains the possibility of renewed challenges in the weeks and months ahead. The failure of the Conservatives to win more convincingly means the government will have its work cut out. After the 2010 election the coalition government held 364 seats. The Conservative government will be lucky if it has 329, when technically 326 seats is a majority (BBC data/projections). The weakness of Labour may help the Tories, but the guile of the Scottish Nationalist Party (SNP) will not. More importantly, problems arising within the Tory party may be a challenge to effective government.
John Major had a much more stable platform than Cameron after the 1992 poll, yet struggled to govern convincingly. "In government but not in power” was the view of Norman Lamont, one of Major's own MPs. Major struggled to deal with the rebels and backstabbers in his own party, and the Conservatives may reprise that experience in the years ahead, especially when the current generation of euro-sceptics seek to achieve their primary aim of leaving the European Union (EU). The fact that David Cameron has already announced he will stand down during the life of the next parliament likely diminishes his authority and raises the probability of fractious behaviour from his own side.
The last Prime Minister?
The second challenge that faces the government and the country post-election is what to do about Scotland. The disaster suffered by Labour north of the border means that Labour – like the Conservatives – is no longer a national party. The nationalists are the big winners in terms of seats, but because of Labour’s failure to do better in England they have no platform to influence what happens in government. This is a receipt for anger and frustration in Scotland. Whether that visceral response is harassed by the nationalists or defused by the Conservatives could be immensely important for the stability of the government and the country. Looking at the form books, you would fancy the nationalists to make the most of the opportunity they have won for themselves. The Scottish schism is real. Could David Cameron be the last Prime Minister of the United Kingdom?
The third and possibly most important challenge for the new government is Europe. Business leaders have voiced their concerns about the dangers of ‘Brexit’, and under different circumstances you would expect the Conservatives – the party of business – to listen to their cries. But these are not ‘normal’ times, and Cameron is obliged to lead the country down the road to an In-Out referendum and, possibly, an exit from the EU. The clock won't start ticking today, but it will at some point: if it looks like Cameron could fail to deliver a vote for staying ‘in’, the markets will take fright.
The smiles fade
Through the prism of party politics it was a good night for the Conservatives. But the challenges of delivering effective government, keeping Scotland in the Union, and dealing with a European issue that has split the Conservative party for the last 30 years may soon see the smiles fade. If that isn’t enough to worry about, demands for electoral reform will come thick and fast once the opposition parties have dusted themselves down. Today Cameron looks like John Major. He must be hoping people aren’t saying the same thing in five years’ time.
Together will Paul O’Connor, Bill heads up Henderson’s Multi-Asset team.