Andrew Goodwin Lead UK Economist, Oxford Economics

Transcription

1 Andrew Goodwin Lead UK Economist, Oxford Economics

2 Brexit and the UK outlook Andrew Goodwin Lead UK Economist 3 rd November 2017

3 The post-referendum sterling slump has been central to the UK story in 2017 UK: Exchange rates $/ Referendum / $/ (LHS) / (RHS) Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source : Haver Analytics

4 Higher inflation has squeezed the consumer 3 UK: Consumption & OE Spending Power Index % year OE Spending Power Index 8 Consumer spending per capita Forecast Source : Oxford Economics

5 while the improvement in the net trade position has disappointed 4 UK: Goods export & import volumes* %3m-on-3m, yr ago Exports Imports Source : Haver Analytics * excluding oil & erratics

6 and the UK has sunk to the bottom of the G7 growth rankings G7: GDP growth, Q % year Canada US Germany France Japan Italy UK Source : Haver Analytics 5

7 Brexit scenario tree stage 1 Stage 1: Outcome of Article 50 negotiations Move straight to ultimate UK-EU relationship in March 2019 Probability 30% Deal on separation and transitional arrangements Probability 70% 6 Key Single market - membership of European Economic Area; Customs union UK-EU customs union with a Common External Tariff; FTA - free-trade agreement for goods but there are non-tariff barriers; WTO - trade with EU according to WTO

8 What would the UK have to do in a no deal scenario? Tariffs on UK-EU trade (and UK must lodge its own schedules at WTO) Full customs controls on UK-EU trade UK must recreate >750 trade treaties to maintain status quo (e.g. air travel, not just with EU but RoW) UK must establish up to 60 regulatory agencies Much of this will have to happen anyway. but no deal means it will need to be ready in 18 months time 7

9 Most likely outcome in a no deal Tariffs on UK-EU trade Full customs controls on UK-EU trade UK successfully negotiates some of the most critical trading arrangements (e.g. air travel) but lack of time & political capital means there is major disruption in some sectors (e.g. chemicals and financial services) with significant non-tariff barriers (NTBs) being erected 8

10 UK-EU trade would be subject to sizeable tariffs & NTBs UK exports: Tariff & NTBs by sector Services Goods Utilities and Construction Other Services Transport and Comms Professional Services Wood and paper Mineral products Metals Machinery ICT equipment Aerospace Other manufactures Motor vehicles Textiles Chemicals Food and beverages Tariff Customs Other NTB 0% 10% 20% 30% Tariff/tariff-equivalent NTB, % Source : Oxford Economics * Financial services & insurance not shown due to difficulty in quantifying tariff-equivalent NTB 9

11 with the UK far more heavily affected than EU countries 10 UK: Share of goods exports affected by UK-EU tariffs Austria Italy Portugal Poland Germany Sweden France Denmark Belgium Netherlands Cyprus Ireland UK 3% 5% 6% 7% 7% 7% 7% 8% 8% 9% 9% 15% UK exports to countries with a FTA with the EU 46% 14% 0% 20% 40% 60% Share of total exports, % Source : Oxford Economics calculations using data from ONS & IMF DOTS

12 We would expect the consequences of no deal to be far worse for the UK than any other country 11 Europe: impact on GDP of 'cliff-edge' Brexit UK Ireland Czech Republic Hungary Netherlands Poland Denmark Croatia Slovakia Sweden Romania Belgium Germany France Italy Portugal Spain Finland Bulgaria Austria Greece % difference in level of GDP in Q relative to baseline Source : Oxford Economics

13 Uncertainties around the no deal scenario results Will the customs infrastructure be ready in time (on both sides) or will there be greater disruption? Will firms be able to alter supply chains immediately to cut out the UK given: Implications for just-in-time supply chains Problems satisfying rules of origin with UK components no longer included as EU production Could the UK government mitigate the impact through looser fiscal and monetary policy? 12

14 Brexit scenario tree Stage 1: Outcome of Article 50 negotiations Stage 2: Ultimate UK-EU deal Single market 7% Move straight to ultimate UK-EU relationship in March 2019 Probability 30% Customs union 13% FTA 5% WTO 70% UK remains in EU 5% Single market 10% Deal on separation and transitional arrangements Probability 70% Customs union 15% FTA 50% WTO 20% UK remains in EU 5% Key Single market - membership of European Economic Area; Customs union UK-EU customs union with a Common External Tariff; FTA - free-trade agreement for goods but there are non-tariff barriers; WTO - trade with EU according to WTO 13

15 Brexit scenario tree final probabilities Matrix of Brexit scenario probabilities Single market Customs union FTA WTO Remain in EU New relationship in place from March % 4% 2% 21% 2% Deals on separations and interim arrangements, leading into new relationship 7% 11% 35% 14% 4% Total probability of ultimate UK-EU trade deals 9% 14% 37% 35% 5% Key Single market - membership of European Economic Area; Customs union UK-EU customs union with a Common External Tariff; FTA - free-trade agreement for goods but there are non-tariff barriers; WTO - trade with EU according to WTO 14

16 How will Brexit impact on long-term prospects? Lower levels of trade = weaker productivity growth, due to reduced competition and ability to generate economies of scale UK likely to become a less attractive destination for Foreign Direct Investment (FDI), which will also weigh on productivity Lower levels of immigration will constrain growth in labour supply. Also migrants tend to be of working age, so there are consequences for the dependency ratio 15

17 The most likely combination of policy and trade agreement is amongst the most damaging options UK: Impact of Brexit on level of GDP in 2030 % difference compared with remaining in the EU LIB CUS LIB BIL LIB FTA Source : Oxford Economics LIB MFN POP CUS MOD FTA POP BIL POP FTA POP MFN Key: Policy direction: LIB liberal MOD moderate POP populist Trade agreement: CUS customs union BIL bilateral accords FTA free trade agreement MFN WTO most favoured nation 16

18 though the impact outside of the UK will be limited Impact on level of GDP in 2030 for POP FTA* scenario % difference compared with remaining in the EU * POP FTA = Populist policies & a UK-EU free-trade agreement UK Ireland reu Austria Source : Oxford Economics 17

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