Barclays: Consequences of a UK exit
To analyse the economic consequences of a potential exit, Barclays has developed a Hypothetical Exit Scenario (HES) for the UK. While they do not take a view on whether the UK should remain in or leave the EU, their baseline scenario remains that the UK does not leave. In assessing HES, there is no relevant historical precedent for a country leaving the EU. An application for EU withdrawal opens a negotiation period of at least two years.
• For 2016-17, Barclays model assumes that UK investment would contract by 1.4% q/q in H2 16 on average, and employment growth turns negative in H2 16. The report estimates that the UK economy would contract in H2 16 and average -0.5% in 2017 (vs +1.8% in their 2017 baseline). The status as Europe’s financial centre would also likely be weakened.
• Markets would naturally ask ‘who’s next’, given that the euro area (EA) would also be subject to high uncertainty. Barclays would expect EA investment to stall, driving EA growth close to zero in 2017. Politically, they expect a binary outcome: either the EA reacts and integrates further, or could eventually disintegrate.
• Barclays model predicts that GBP weakness would be most pronounced immediately after a UK exit (10% depreciation of the GBP NEER in Q3 16), but would gradually recover about two thirds of these losses by end-2017. However, given expected EA weakness, they do not expect GBP to move as much vs. EUR.
• As report shows, we could expect the BoE to cut the policy rate and possibly undertake a new asset purchase programme. The ECB would also likely react to volatility by extending its quantitative and credit easing.
Source: Barclays – Thinking Macro report
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