A more pragmatic approach to the Northern Ireland protocol would lower the risk of a trade war with the EU

The resignation of Prime Minister Boris Johnson could leave a policy vacuum in the UK as the Conservative Party embarks on a leadership contest, potentially taking a couple of months.

The uncertainty could add to pressure on sterling, particularly if the contest doesn’t result in a clear policy direction, according to Oxford Economics. And with major fiscal decisions on hold, the focus on the BoE will increase.

The impact of a leadership change on the economic outlook further out will depend on the next prime minister’s views on fiscal policy and the Northern Ireland protocol.

While candidate pitches are likely to focus on tax cuts, those plans will probably end up watered down. But a more pragmatic approach to the protocol would lower the risk of a trade war with the EU.

“We face a policy vacuum at a time when the economic outlook is fragile and the cost-of-living crisis continues to escalate. We’re unlikely to see any further fiscal support for struggling households in the near future, which adds downside risk to growth and is likely to stop the BoE from increasing the pace of rate hikes,” said Andrew Goodwin, chief UK Economist.

Meanwhie, the CBI has called for the political vaccuum to be filled ‘at speed’. Tony Danker, CBI Director-General, said: “Getting the economy growing again has got to be the number one focus for all politicians, and I look forward to working with the government on a plan for a better, brighter economic future for people right across the United Kingdom.”