After a decisive victory in the UK’s general election, Prime Minister Boris Johnson has a strong mandate to “get Brexit done.” But the eventual shape of his Brexit deal is still far from clear.

Holding 365 out of 650 seats in the UK Parliament, Johnson’s Conservative Party has an overall majority of 80. He therefore has a strong mandate to pursue his Brexit deal and is in a much better position to manage potential splits in his party.

Near-Certain Departure in Early 2020

There’s now little doubt that the UK will leave the European Union (EU) early next year. The big question is what Johnson will do with the mandate handed to him by the British people. The narrative emerging since the vote is that the strength of Johnson’s victory will allow him to change tack and steer the UK toward a soft Brexit. Effectively, that would keep the UK closely aligned with its former EU partners in terms of regulations and trading arrangements, and might also involve continued UK contributions to the EU budget.

That result would obviously be the market’s (and the EU’s) preferred scenario, and would certainly justify the immediate gains in the pound sterling. But we would be cautious about placing too much faith in this soft-Brexit narrative. Indeed, the chief proponents of this view seem to be people who’d prefer the UK not to leave the EU at all—and who would seem to have learned nothing from the strength of feeling expressed by the UK electorate in the latest vote.

That doesn’t mean we should rule out this possibility (Johnson is not known as a model of consistency). But to change tack to a soft Brexit, the Prime Minister would have to ask the EU for a further extension of the UK’s Brexit transition phase beyond the end of 2020, which would mean continued payments to the EU during the extension period. Many people who voted for Johnson this time would regard that change of course as a huge betrayal—as would many Conservative members of Parliament. So the threat of a hard Brexit (which would involve a much more decisive and disruptive break with the EU) at the end of 2020 remains very real.

Government Stability…But Growth Rebound Unlikely

So where does this leave us? The good news is that the UK now has a strong and stable government for the first time in several years, and that the tail risk of a hard-left Labour Party running the country has been removed (at least for the time being). Moreover, the economy is likely to benefit from a modest fiscal boost, as Johnson seeks to address the needs of his supporters in newly won seats that had traditionally voted Labour. But it’s hard to see a significant rebound in growth while the risk of a hard Brexit remains on the horizon.

The same applies to the pound. It may still have some near-term upside after the Tory victory, but will find it hard to break out of a 1.30–1.35 range versus the US dollar, barring positive news on the future trading relationship with the EU. Conversely, the pound is still subject to downside risk if the path turns out to be heading toward a very hard Brexit at the end of 2020.

Phase one of “getting Brexit done” is likely to take place at the end of January; phase two remains a tricky proposition.

Darren Williams is Director—Global Economic Research at AllianceBernstein.

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