GBP: Some Respite as ‘Leave’ Provides a Scenario - MUFG
Derek Halpenny, European Head of GMR at MUFG, suggests that the pound has had some respite of late with the BOE broad trade-weighted index 1.5% higher than the low hit on 8th April.
Key Quotes
“If anything the opinion polls have shifted a little in favour of the ‘Remain’ campaign with the ‘Poll of Polls from ‘whatukthinks’ showing a widening to 52% - 48% after being stuck at 50% - 50% for a period. It’s too soon to assess the impact of the UK Treasury document released on Monday that provided three scenarios with somewhat dubious conclusions over how much weaker real GDP would be by 2030. There were no positive outcomes – even going down the route of Norway – a member of the EEA – would still result in a loss of GDP of between 3.4% and 4.3%. Basically, it is a forecast of the divergence from a forecast for GDP in fourteen years’ time!
In fact, taking a look at what the new Tory/Lib Dem government in 2010 was predicting for real GDP in 2015 to where growth actually was last year, the divergence was similar to one of three negative Brexit scenarios outlined by the UK Treasury this week – and that was over a five-year period not fourteen. 2015 didn’t feel particularly disastrous to me, or indeed to UK consumers given consumer confidence last summer hit the highest level since 2000!
Yesterday, it was the turn of the ‘Leave’ campaign to lay out a picture for post-Brexit. Michael Gove (Justice Secretary) indicated that the UK would still be part of the EFTA but would not seek access to the Single Market and therefore would be free of regulatory burdens and laws on the free movement of people. But being just an EFTA member is not necessarily ideal. Why then has Switzerland agreed many bilateral trade deals on top of being an EFTA member itself? Switzerland through these bilateral deals agrees to meet many EU trade regulations and contributes to the EU budget. Why do this if being just an EFTA member is good enough?
Mark Carney yesterday also outlined some scenarios surrounding Brexit and one crucial one focused on the large current account deficit, which was at 7% of GDP in Q4. Governor Carney stated that financing that deficit would become more expensive being outside the EU, implying higher interest rates and more expensive credit generally for households and companies. He acknowledged that Brexit risks were becoming apparent in financial market pricing. That is certainly clear to see with the pound which is currently undergoing one of the worst performances since the Great Financial Crisis in 2008-09 and the ERM crisis in 1992. We expect that to continue and probably intensify as we move gradually toward the referendum on 23rd June.”
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