Will there be Theresa May after May?

Every day brings fresh speculation of a challenge to Theresa May’s leadership.

There’s a rising volume of discontent over the Brexit negotiations in the Conservative Party.

A bad set of results in this May’s local elections could be a catalyst for a leadership challenge.

Profound splits over Brexit

Bloomberg published an article illustrating the profound splits in the Conservatives over Brexit. It sets out three different Brexit positions held by the Prime Minister and two of her leading ministers:

Trade Minister Liam Fox wants the UK out of the customs union. Chancellor Philip Hammond wants to maintain the status quo.

Theresa May on the other hand, “..would support staying in the customs union after Brexit to minimize friction at the U.K. border”

A fine Balance of forces

Theresa May’s survival is due to a fine balance of forces between factions. As things stand they each lack the strength to strike a decisive blow.

These factions are also united by a fear of the consequences, a Labour government. But as soon as one faction fears they will be disadvantaged by not making a move, that consensus will collapse.

Tipping points for a challenge

A challenge to Theresa May does look unlikely in the coming weeks.

Nevertheless, bad local election results in May could prove a tipping point. The Conservatives would conclude that Theresa May is an electoral liability.

Market impact of Theresa May’s fall

Theresa May’s fall that would not necessarily cause the government to collapse. But a new leader would not be able to resolve the splits in the party.

In all likelihood there would be greater instability resulting in a two further risks for markets:

  • The greater risk of a ‘hard Brexit’
  • The fall of the Conservative government, making way for a Labour government

It may seem counter intuitive but there would be an upside to a Labour government.

Be alert to a countervailing factor

A Brexit impact analysis by the government, leaked to Buzzfeed, concluded a permanent loss in GDP.

Three Brexit options are examined and compared to remaining in the EU. Each option shows a reduction of GDP ranging from 2% to 8% over 15 years. Bearing mind the pound’s behaviour after the Brexit vote, that indicates a long term drop in the value of the pound.

Labour is committed to a much more business friendly soft Brexit. There’s also a greater possibility of Article 50 being halted.

We should be alert to this countervailing factor. It could help counter the long term drop in value of the pound.

Pound’s volatile downwards tilt

A challenge to Theresa May, especially a successful one, will force the pound into another volatile downwards tilt. That would continue its decline following 2016’s Brexit vote…

Gary Hollands

Geopolitical analyst Tyga FX