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No deal Brexit , will it John Ashcroft, Economist and author of The Saturday Economist, weighs up the evidence. Britain faces a ‘devastating recession’, a plunging pound and soaring prices if a ‘No deal Brexit’ takes place, according to a recent analysis from ratings agency Moody’s. Here’s how that works out ... in the event of no agreement to an orderly exit from the EU, the UK would face a considerable crisis of confidence leading to a fall in output. Is this likely? Just what will happen next? Let’s review the scenario...
The crisis of confidence would impact in three main areas, currency, consumers and capital investment.
Financial markets would push the pound lower, consumers would restrict spending and businesses would hold back on investment plans. That’s the general idea. Let’s look at each one in detail. Sterling has demonstrated volatility on Brexit fears ... Sterling has demonstrated considerable volatility on Brexit fears. The Pound rallies on hopes of a deal with Brussels and falls as a
another solution to the talks appears elusive. Ahead of the referendum at the beginning of June in 2016, the pound was trading at $1.43 against the Dollar. By the end of August it was trading at $1.33. By September the currency had fallen to $1.22 - a drop of 15%.
Ten year gilts rates would rise from the ludicrously low levels of 1.50% currently, to an historical norm of 4.50%. Consumer Spending will be hit … The Bank of England would be forced to act to ‘defend the currency’ and invoke the ‘The Kindness of Strangers’ to ‘Stick with Sterling’ and hold gilts.
Confidence in a solution to negotiations pushed Sterling back above $1.40 in the Spring of this year. By mid August it had plummeted once again to $1.28. Currently the Pound is trading at $1.30 for reasons we cannot be entirely sure about.
Base rates would increase suddenly to 5% or 10%! Mortgage rates would be much higher, house price activity would diminish. Pressure would increase on house prices. The fall in house prices could be over 30% over three years according to a Bank of England worse case scenario.
If ‘No Deal’ is the solution, markets would expect a fall in Sterling similar to or worse than the fall in Sterling in 2016. This could push through support levels around $1.20 and move even lower towards $1.10.
The fall in Sterling would lead to higher import prices, leading to an increase in energy costs and petrol prices. Retail prices would rise across the board as import costs increase.
Against the Euro, the pound, currently trading at €1.13 against the Euro, could fall to €1.10 or even parity. Foreign investors would lose confidence in the value of the pound. A capital flight would ensue. Overseas investors and central governments would be reluctant to hold UK government gilts.
The squeeze on real incomes, (rising prices ahead of earnings) would lead to the fall in the volume of retail sales and household spending generally. Capital Investment will fall... Businesses sensing a loss of output in the medium term would cut back on investment plans, major exporters to the EU specifically would be badly hit. The rising cost of capital would further inhibit spending. Business would relocate manufacturing capacity to within the single market trade area. Moody’s claim, a no-deal scenario would be ‘credit negative’ for businesses in a wide range of industrial sectors, including car manufacturers, airlines, aerospace and the chemicals industry. The banking industry could see a fall in credit ratings, putting pressure on and within the banking system. The higher education sector would be badly hit with difficulties in recruitment and tenure of EU staff, compounded by a fall in student numbers. We would have trouble picking fruit in the summer
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