The Tories may have reassured the markets – but it won't last long

The markets want clarity – the Tory majority has given them that. But a cyclical recession could take it away

Related video: Boris Johnson promises to focus on the NHS and Brexit after winning majority (AP)

There is a knee-jerk reaction and a more measured one. From a British perspective, the election dominates everything. But from a global one, news that the US and China are on a path to an interim trade deal is, of course, more important. For the worlds of finance and business, both are thoroughly welcome. The markets want clarity – they now have it in spades.

Already sterling has responded to the election – continuing the rebound it began two weeks ago when the YouGov MRP poll predicted a Tory majority – nudging to $1.35. Equities have also responded, though it is hard to separate the impact of the UK election impact of the US-China trade deal. The FTSE 100 Index, which represents the largest companies on the London Stock Exchange, climbed by around 1 per cent in early trading, with gains chipped back by the rise in the pound. (Some 70 per cent of the earnings of companies in the FTSE come from outside the UK, either in revenues from foreign subsidiaries or from exports). The prospect of a boost to the UK economy – and there will be one – helps UK-based companies that depend heavily on the domestic market. So the more domestically-focused firms in the FTSE 250 Index shot up by some 5 per cent in early trading to an all-time high.

The big knee-jerk story from the markets is both predictable and welcome: clarity, clarity, clarity.

The more measured response will not show through until well into the New Year. There will be three things to look for that will give us a feeling for how that might develop.

The first will be the response from European politicians to the Conservative victory. There is a new Commission in Brussels that has many other issues to tackle other than Brexit. It will be in the economic self-interest of the EU nations to deal as swiftly as possible with the actual exit of the UK but also cooperate on the subsequent trade deal. From a practical point of view, Brussels now knows that it is dealing with a UK government that can get legislation through. The trade negotiations may prove easier than expected – but also may not.

Second, we need a UK budget and will get one presumably in the first few weeks of next year. There will be some sort of fiscal boost, since the taps have to be opened. Will this be a measured increase in spending, or something more radical? Will the deficit, already climbing, go through 2 per cent of GDP? Elections, whatever their outcome, do not change the fiscal maths. Things could get ugly fast if the government’s finances start to slip further into the red.

Third and following on from this, the Tories need decent global growth if they are not to disappoint their newfound supporters. That is why the US-China relationship matters so much. We need the long expansion of the world economy to continue if employment is to keep rising. We need employment to keep rising alongside the (welcome) trend to higher wages. And for that to happen we need stability in our existing trading relations more than fancy new deals with the rest of the world.

One final thought. In all likelihood, the Tories are going to be governing for the next five years. But those five years will, also in all likelihood, see the next cyclical recession. Elections, even landslides, don’t change that.