Hung parliament: is uncertainty is the new normal?

For investors, advisers and business leaders alike, uncertainty is the new normal for post-referendum, post-election UK. We look at the impact of uncertainty on the UK's independent workforce, employment laws, start-up growth ambitions and M&A activity.

The results of the 2017 general election has resulted in a hung parliament with no single party holding a majority. This means that the passing of laws will have to be achieved through the brokering of deals or the formation of a coalition – much like the Conservative-Liberal Democrat coalition of 2010-2015.

What does this mean for UK businesses? Investors, advisers and business leaders alike, uncertainty is the new normal.
“Faced with all the uncertainty of Brexit, a hung parliament was the last thing the UK business community needed, but that’s exactly what it got,” says Paul Goodman, chairman of the National Association of Commercial Finance Brokers (NACFB). “Businesses, like markets, need certainty and a sense of direction to thrive. Following the shock election result, they have the exact opposite. UK politics is once again in a state of disarray and this is a tough environment for any business, especially those with international exposure, to operate in.”

“The world is looking at the UK more closely than ever, and the UK economy needs to exude strength. Business owners need to be reassured that the economy remains a key focus and is not forgotten amid the political infighting that’s surely set to come. Thankfully the UK economy is in a good place at present. It will certainly need to draw on all its reserves in the weeks and months ahead.”

For Chris McCullough, CEO and co-founder of tech start-up, RotaGeek, this election has certainly shaken the political establishment. Regardless of whether it is for the good or not, these results definitely come at the cost of short term volatility. The lead up to Election Day saw narrowing polls, and once the exit polls suggested a hung parliament it became clear that earlier predictions were yet again wrong. “The end results of this election mean that instead of focusing on the incoming Brexit negotiations, our politicians need to focus their attention on two fronts: Europe and the developing Constitutional crisis at home. The election was, apparently, called to strengthen the UK’s negotiating hand. Calling an election was, in retrospect, an error on monumental proportions, at a time when the UK needs to focus everything on making Brexit a success,” he adds.

“Seen from a very Darwinian point of view, great things happen in difficult environments. As with Brexit, instability and uncertainty are the basis of change. Start ups and scale ups are built with an inherent agility and are best placed to leverage this opportunity for good. “

The impact on employment

From a Darwinian perspective, where only the strongest and most adaptable businesses and institutions survive, where do the self-employed stand? Qdos Contractor CEO, Seb Maley believes that it’s in times of uncertainty that the UK’s independent workforce has shown its true value to the economy. The self-employed have contributed £119 billion in 2016 – a year dominated by Brexit concerns.

“It’s time the growing needs of the UK’s 2million freelancers and contractors were prioritised. Recent and questionable changes to the tax system have targeted the independent workforce. This cannot go on. It’s clear that any incoming government has a fresh opportunity to work with freelancers and contractors to build a fairer, smarter and simplified tax system – and one which the independent workforce, the economy and indeed any government will benefit from,” he says.

Enrique Garcia, a consultant for employment law, says at this early point, it’s too soon to tell. “Parliament is due to meet for the first time on 13th June so the Conservatives will need to have a plan in place by then. The next big date is 19th June, the date that Brexit talks are supposed to start, as well as the Queen’s Speech. This is the big test that will show if the government has enough votes to get its programme of proposed new laws passed,” he says.

“It is unclear what this means for business and employment law. It is not clear what policies the Conservatives will need to drop in order to get the DUP on side or whether they will continue their policies in full and hope to garner support from other parties in order to squeeze them through parliament.  Despite the political excitement as how this will pan out, for business and employment law the future is uncertain and quite literally anything can happen. Watch this space.”

Some experts are saying that it is now likely a “softer” Brexit will be carried out as the Conservatives campaigned on the basis of a “hard Brexit” and the public did not provide them with the support to carry this out. With some key Conservatives against leaving the single market, and the EU ready to negotiate, there are suggestions that Brexit will be delayed or postponed, says Alan Price, employment law and HR director of Peninsula.

“Other important points of the election campaign are likely to be continued by the Conservatives as there is general support for change in these areas. Ensuring rights for workers in the ‘gig economy’ is an important focus for any future government and the Conservative-commissioned Taylor report in to modern employment practices will report on these areas. Although the Conservative manifesto was silent on zero-hours contracts, in contrast to the other parties, Taylor has indicated that he will recommend a right to request zero hours contracts,” Price explains.

The Conservatives also campaigned on the basis of increasing workplace family rights through creating a statutory right to time off for carers and child bereavement leave; increasing the National Living Wage to 60 per cent of median income by 2020 and amending disability laws to ensure short-term mental health conditions are protected. “For now, businesses and employers are likely to find themselves in a further period of uncertainty until the future government and employment law initiatives are confirmed.”

The impact on growth ambitions

New global research from EY reveals British businesses are unfazed by uncertainty and are forecasting higher growth than all 30 countries surveyed, easily outstripping the US and even fast-growth tiger economies India and China.

Despite Brexit and the recent general elections, UK start-ups display the highest levels of confidence of the countries surveyed. 49 per cent have growth ambitions of more than 11 per cent for the coming year. In contrast, in the US, 35 per cent of all companies plan modest growth increases of under 5 per cent. In China and India 67 per cent of companies are targeting growth rates of 6 per cent to 15 per cent.

The EY Growth Barometer is a survey of 2,340 executives in middle market companies with annual revenues of US$1 million to US$3 billion. The latest iteration of the study reveals that most global executives are surprisingly upbeat about the growth prospects for their companies despite widespread economic and political uncertainty. In the UK, it’s a more pronounced uptick in optimism.

“The global economic backdrop is much stronger than what the prevailing narrative has been telling us. Despite geopolitical risks and uncertainties, businesses being disrupted through new technologies and globalisation rewriting the rules of supply and demand, middle market leaders are not only attuned to uncertainty, but are seizing it to grow, disrupt other markets and drive their growth agendas,” says Annette Kimmitt, EY Global Growth Markets Leader. 

“Middle market leaders are using technology to attract and retain talent, accelerate growth, improve productivity and increase profitability. Uncertainty has become the new normal, and while geopolitical risks and trade barriers are influential factors, middle market companies are moving ahead with hiring plans.”

The impact on M&A activity

Research from the University of East Anglia has found that the EU referendum and surrounding uncertainty has resulted in a significant drop in mergers and acquisitions (M&A) activity in the UK. In the 11 months before last June’s referendum, the average monthly number of M&A announcements was around 430. Almost a year on from the historic vote, the study’s preliminary findings estimate that M&A activity fell by 15 per cent – or by around 60 mergers a month – as a direct result of referendum uncertainty. Since then M&A activity has failed to recover to its pre-referendum level.

To determine a link between the referendum and M&A activity, Lead researcher Dr Peter Ormosi for UEA’s Centre for Competition Policy, used data from countries where no referendum had taken place, against which the changes in the UK could be compared. If the countries are sufficiently similar to the UK in terms of pre-referendum M&A activity, it can be assumed that they represent how M&A activity would have evolved in the absence of the UK referendum.

This control group – France, Netherlands, Spain and the United States – was created based on a comparison with the UK on various attributes that would be expected to affect M&A activity in any country. These include GDP, ease of doing business index, inflation, interest rate spread, lending interest rate, research and development expenditure, tax revenue, unemployment, and total monthly value of transactions.

The researchers found that pre-referendum M&A activity in the UK and control group was almost parallel, but a clear change started taking place around the start of the referendum campaign, with UK activity dropping, while the control group’s remained roughly around the same level, implying that the monthly number of M&As dropped as a result of the uncertainty surrounding the referendum.

“While it is widely recognised that last year’s EU referendum caused significant uncertainty for markets, some early indications were that it had not reduced the level of business confidence. We find that the referendum has in fact led to a significant drop in merger numbers. This is bad news. The vast majority of mergers, unless they have a significant adverse effect on competition, have the potential to contribute to social welfare, for example by reducing transaction costs, or by enhancing the efficiency of the merging businesses.”

“If competition is left undisturbed, these benefits are passed on to consumers in the form of lower prices. When there is a setback in M&A activity, it means that some of these potential benefits are foregone. These preliminary findings also suggest that the post-referendum policy uncertainty is helping the largest M&A transactions, while hindering the smaller ones, with possible negative consequences,” he says.

The largest businesses have become more M&A active since the referendum. The researchers suggest this is a “worrying sign” and might be to do with the largest firms being cushioned from the increased uncertainty of Brexit, perhaps as a result of being better-able to exert influence over politicians through ‘rent-seeking’ behaviour, manipulating political and economic conditions to increase profits.

Given the size of the business, it was mainly the proportionately larger deals that declined after the referendum, whereas the deals that were small in comparison to the acquiring business’ size were not significantly affected. Dr Ormosi says this makes sense, as with the perceived increased uncertainty and risk that Brexit brings, firms would be most cautious about the deals that are similar or large relative to their own size.

“When we find that the largest transactions and the largest businesses were not hindered, and in some cases were even spurred, by the referendum, one inevitably worries. How much of this differential effect is due to the fact that these larger businesses are cushioned from the increased uncertainty, thanks to their rent-seeking behaviour? Transitional periods are never good for businesses and consumers, but what makes it even worse, is that businesses do not seem to be equally exposed to the same risk from the increased policy uncertainty, and those that are more likely to have political influence seem more protected from these risks.”

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.

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