The economic cost of a no-deal Brexit could be two or three times as bad as the impact of Covid19, a report has concluded.
Analysis by the London School of Economics and UK in a Changing Europe says “a no-deal Brexit would represent a further major shock to a UK economy” with a “major set of changes” to the economic relationship with the country’s largest trading partner.
“Our modelling with LSE of the impact of a no-deal Brexit suggests that the total cost to the UK economy over the longer term will be two to three times as large as that implied by the Bank of England’s forecast for the impact of Covid-19,” says the report.
LSE modelling puts the long-term economic hit from a no-deal Brexit at 8% of GDP, similar to that of the government’s own forecast in 2018 of 7.6%, which amounts to £160bn in today’s money, or £2,400 per person.
“In the long run, Brexit is likely to be more significant” depressing the country’s economic output over 20 years, says the report, titled 'What would no deal mean?
Economists have talked of V-shaped, W-shaped and K-shaped recoveries from Covid19, but a no-deal Brexit will make it “harder for the UK to ‘grow its way out of trouble’,” the report says.
Pound traders are positioning for a choppy ride as trade negotiations between Britain and the European Union reach a watershed moment.
Traders are getting jumpy as the Dec. 31 deadline to reach an agreement nears. Many investors expect the two sides to strike a deal, which leaves the currency vulnerable to any setbacks that could upend that assumption.
The pound may weaken to $1.25 -- about 6% -- if the U.K. and European Union fail to reach a trade agreement, according to a Bloomberg survey of nine strategists last month. For now, investors are positioned for more turbulence, with the cost of insuring sudden moves in the pound over the coming week rising to the highest in almost a month.
While some investors are still holding out for a payday when a trade agreement is signed, others are looking further out and say the U.K.’s economic outlook seems grim. For TD Securities, the damage the coronavirus continues to inflict on the nation’s domestic output -- which is more vulnerable now that the transition period from the EU is almost over -- is hurting the pound’s prospects. JPMorgan Chase & Co. estimates the currency will settle in the low $1.30s after the U.K. and EU strike a deal.
Sterling had its best November since 2006, buoyed by the U.S. dollar’s drop and encouraging rhetoric from both the U.K. and EU on the possibility of a trade agreement. It rose to as high as $1.3441 this week, a few cents shy of the strongest level in a year, despite suffering one of the biggest economic slumps among developed nations in 2020.
And while the likes of Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, is bullish on the pound in the hopes that Brexit will help the U.K. unleash its “animal spirit,” risk reversals and positioning data suggest otherwise.
f there’s a trade deal, “we accept the possibility that GBP could overshoot by a couple of cents, call it 1.35, but we see little value owning GBP for what could be a very-bounded, and potentially short-lived, relief-rally,” Paul Meggyesi, JPMorgan’s head of global foreign-exchange strategy, wrote in the bank’s 2021 outlook. Even if the U.K. enters a free-trade agreement with the EU, 4% would be shaved off the nation’s gross domestic product in the long run compared to where the economy would’ve been if Brexit never happened, the OBR forecasts. Failure to reach a deal, which means adopting World Trade Organization rules, would entail another 1.5% loss in GDP.
Brexit isn’t “favorable for an economy that hasn’t fared well through a pandemic,” McCormick said.
“The optimism around Brexit itself is fully priced in and a little too optimistic relative to where we go in the next couple of weeks,” said Mark McCormick, the global head of foreign-currency strategy at TD Securities. The investment bank’s 2021 outlook recommends selling the pound if an accord is signed.
For the coming days , the political posturing and rhetoric will continue as both sides will not want to show any weakness in negotiations and as such, expect Sterling to move with the news until and if a deal is reached. Expect little impact if a deal is finally announced in whatever format, buy expect a slump in the Pound if the UK leaves with no trade deal with its biggest economic partners.
Forex traders are taking advantage of the volatility.