The EU agreed to delay Brexit until the end of January 2020, setting the stage for elections and a showdown between the major parties.

The political situation in the United Kingdom has been moving rapidly. The EU extended the deadline for Britain's departure from the bloc by three months to January 31, 2020. Attention has turned to the U.K. national election in mid-December 2019. It is now clear that a "no deal" Brexit is highly unlikely. While this matters for the domestic economy, growth in the United Kingdom is ultimately vulnerable to shocks from slowing global growth. The shape of the future relationship between the U.K. and the EU will be determined by the election result. There are broadly three possibilities: a close relationship with the EU (a variation of the "Norway option"); a more distant relationship with the EU (a variation of the "Canada option"); and remaining in the EU.

How all of this works out will depend on the election result. In October, the House of Commons passed the Early Parliamentary General Election Bill to allow for elections on December 12. The impasse in parliament over the U.K.'s withdrawal agreement with the EU prompted the move. Polling has pointed to some significant shifts in Britain's party politics. Historically, the governing Conservative Party and the Labour Party have dominated politics, but more recently the Liberal Democratic Party and the Brexit Party have emerged to disrupt that trend. At the moment, the Conservatives have a non-majority lead.

A "soft" Brexit in the cards

If the Tories win the election, we have to consider how strong the "Spartans" of the European Research Group (ERG) are within the governing majority. The ERG is made up of pro-Brexit Conservative Party lawmakers. A large Tory majority would leave them powerless; a small Tory majority would give them real influence. If Prime Minister Boris Johnson does win the election, he will implement his Withdrawal Agreement and proceed to negotiate the future relationship with the EU. The U.K.'s economic interest is clearly best served by retaining very close links, including close regulatory alignment, with the EU. The British economy expanded by 0.3% in the third quarter, marking a rebound from the second-quarter GDP which contracted by 0.2%. The free trade fantasists in the ERG cling to the dream of "global Britain" trading freely with the Anglosphere, which would require regulatory divergence with the EU and thus a less close economic relationship.

There will be a lot of back and forth about this if Johnson wins. The intensity of the debate will be a function of the size of his majority and therefore the influence of the ERG. Eventually, we expect the "soft Brexit" vision to prevail. That is what the business community wants and, if push came to shove, Johnson could probably rely on votes from opposition parties to offset the ERG if a variation of the "Norway option" was on the table. But it would take quite a while for this to play out.

U.K. GDP growth holds steady

Interpreting opinion polls

If the Conservatives are unable to form a government, there would probably be some kind of coalition among Labour, the Liberal Democrats, the Scottish Nationalist Party, and some other small parties. This government would seek to renegotiate the Withdrawal Agreement with the EU, and then put this agreement to a referendum with the option to leave the EU with this agreement or remain in the EU.

Opinion polls in the U.K. have been hard to interpret in recent years for a number of reasons. Turnout has varied more than pollsters expected. There has been a lot more vote-switching in the past decade (i.e., party loyalty has weakened significantly), and potential voters are harder to sample amid the switch from landlines to mobile phones. Opinion pollsters have made a range of methodological changes to deal with these issues, but one consequence has been quite large differences in polls from different pollsters. In addition to these factors, it's getting harder to translate overall public voting preferences into seats in the House of Commons. It's also not yet clear how many candidates will stand for the Brexit Party and how successful they will be in siphoning off support from the mainstream parties.

Opinion polls seem to suggest a large Conservative majority, and we would judge this to be the most likely outcome.

For all these reasons, it is hard to feel confident about the outcome of the election. Opinion polls seem to suggest a large Conservative majority. We believe this is the most likely outcome. But we will have to watch the election campaign and keep an eye on what the polls suggest. Polls on "leave/remain" suggest that, if there were a new referendum, "remain" would win by a small margin. Still, we can't be confident about this. There would be a referendum only if the Labour Party and others do better in the election and are able to form a government.

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The global economy is likely to stabilize at around the current growth rate.