Theresa May’s government will collapse in 2018, triggering a fresh general election, Morgan Stanley says

Prime Minister Theresa May’s Conservative government will collapse in 2018 and trigger a fresh general election, according to research from Morgan Stanley.

“We think the government survives in 2017, but falls in 2018,” the note, compiled by a team of economists and strategists led by Jacob Nell and Melanie Baker.

After failing to win an overall majority in June’s general election, May was forced to enter into a confidence and supply deal with the Northern Irish Democratic Unionist Party (DUP) to ensure that she could govern.

May’s slender parliamentary majority means only a handful of hardline Brexiteers would need to rebel against May on the issue to cause a disastrous government collapse.

Morgan Stanley’s basic argument for suggesting that the government will collapse in 2018 is that May will be able to tread a tightrope of just about satisfying both the moderate and more radical wings of the Conservative Party – as well as the general public – until the end of 2017, but not for much longer.

“This year, we think that the government makes enough concessions to allow the talks to progress, and the government holds together since the outcome of the talks is still open and Labour are ahead in the polls,” the team writes.

Brexit talks are currently stuttering, with Brexit Secretary David Davis and the EU’s chief negotiator Michel Barnier holding a tense press conference last week at the conclusion of the latest round of negotiations. During that conference, Barnier said that British and EU negotiators made no “decisive progress” on the key issues being discussed, while Davis said virtually the opposite.

The two sides are yet to reach an agreement on the issues of citizens’ rights, the Northern Irish border, and Britain’s financial obligations, or the “Brexit bill” as it’s more commonly known.

Talks on future UK-EU relations, including trade, were originally scheduled to commence next month. However, that now looks unlikely with the two sides struggling to find common ground on key issues.

While these issues can be navigated during 2017, by 2018, the pressure will sufficient to cause the government to split on key issues and consequently split. Here’s Morgan Stanley again (emphasis ours):

“Next year, however, we think that the government is likely to fall. We expect the EU to offer a choice between a close relationship in which the UK can participate in the single market and customs union but will be bound by the EU rules of the game, and an arm’s length relationship in the UK, in which the UK achieves full sovereignty over borders, courts and laws, but does not participate in the single market and the customs union.

“We think this choice splits the Cabinet and the Conservative party and will lead to a loss of a vote of no confidence in parliament, triggering early elections.”

This political turmoil will then spill over into the economy, the note argues, saying that the government’s collapse will “push growth to a standstill,” something that could lead the Bank of England to cut interest rates or engage in a fresh programme of quantitative easing, although that is unlikely.

“In turn, we expect the associated political instability to drive weaker consumption and investment,and push growth to a standstill, leading the BoE to consider – but in the end decide against – easing policy to support growth,” the team writes.