Author: James Skinner
Date: 9 October 2017
A «No Deal» WTO Brexit would mean the Pound-to-Dollar rate falls to 1.10 and the economy enters recession, contracting by 1%.
The currency market is consistently underpricing the risks posed to Sterling by a possible breakdown of negotiations between the UK and the EU, as well as the likely economic consequences of a “no deal Brexit”, which strategists at HSBC say could see the Pound fall as low as 1.10 against the US Dollar.
Scenarios under which the UK could leave the EU range from a so called soft-Brexit, where little about the current relationship changes, to the “no deal, hard Brexit” that many in the City of London and Westminster have feared since plans for a referendum were first announced.
Each has its own consequences for the economy and for Sterling and all are subjects that research teams at HSBC have spent time getting to grips with and analysing in one of their latest research reports.
“To make a forecast on the UK requires taking a view on a political process which is hostage to the forces of time, logistics, politics and personalities,” says Elizabeth Martins, an economist at HSBC Bank plc.
A “soft Brexit”, where very little changes and the UK remains inside the EU’s single market and customs union, could see economic growth return to the 20014-2016 level of 2% or more.
Although here, domestic political uncertainty and questions over the sustainability of such an arrangement prevent Sterling from recovering to levels seen before the referendum.
Martins says the most likely outcome of Brexit negotiations, her central case forecast, is for what Prime Minister Theresa May terms a “creative Brexit”.
This sees an orderly departure from the EU that begins with the UK entering a transition period on 29 March 2019 and culminates in a near-complete break with the EU and a negotiated free trade agreement taking effect at least two years after exit day.
Under that central-case scenario, the UK economy continues to grow at or around current rates, even though uncertainty around a final deal remains, because a so-called “cliff edge” has been averted by the transition agreement.
Three Scenarios: Implications for Investment, Consumption, Inflation, Growth etc.