The short‐term impact of Brexit |
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| Abstract: | - A scenario run on the Oxford Global Model suggests that Brexit would leave the level of UK GDP 1.3ppt lower by Q2 2018 compared with our baseline forecast that the UK votes to stay in the EU. A vote to leave would mainly shock business confidence but consumers would be adversely affected too. Exporters in price‐sensitive sectors would benefit from a weaker exchange rate.
- Market pricing suggests that sterling could initially fall by around 15% before recovering some of its losses, while the heightened uncertainty would also be expected to drive a sharp drop in equity prices in H2 2016.
- Brexit would present something of a dilemma for policymakers. While a weaker pound would cause inflation to initially spike upwards, we would expect the MPC to look through this and cut Bank Rate in order to support activity. And with the UK likely to retain its reputation as a safe haven, this would also see gilt yields stay lower for longer.
- Weaker growth would also put the Chancellor in breach of the fiscal mandate, though we would expect him to plead extenuating circumstances, rather than tighten policy and potentially exacerbate the slowdown.
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