- Ongoing discussions about the details of the divorce agreement combined with a polarized political landscape in the UK have increased the likelihood of a ‘No deal’ and resulted in higher uncertainty. The cost of such uncertainty could be as much as -0.1pp of GDP growth per quarter between now and making a deal, due to financial stress on the sterling, contingency stocking by companies and depressed consumption.
- We continue to expect a ‘Blind Brexit’ (70% likelihood), that is, a last-minute deal with the EU where both sides agree on a Free Trade Agreement with very close ties. This should pave the way for a transition period – by the end of 2020 – during which there will be no changes to the trade in goods and services and no migration control. Temporary market relief is expected in the aftermath of the agreement, with the pound to euro exchange rate going back to 1.14 after reaching a low point of 1.06-1.09 at end of 2018.
- In a ‘No deal’ scenario (25% likelihood), the UK will exit the EU under the WTO conditions. This means around 4% to 5% of mutual import tariffs. Overall, we would expect the GBP/EUR to fall to 0.88 in late 2019. Total good export losses for the UK would reach GBP30bn in a year. Top EU losers on exports of goods include Germany (~EUR8bn in the first year following the EU exit), the Netherlands (~EUR4bn), France (~EUR3bn) and Belgium (~EUR3bn).