andrew goodwin - advantage austria€¦ · stage 1: outcome of article 50 ... * financial services...

Andrew GoodwinLead UK Economist, Oxford Economics

Brexit and the UK outlook

Andrew Goodwin

Lead UK Economist

3rd November 2017

The post-referendum sterling slump has been central to the UK story in 2017

2

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

$/£ (LHS)

€/£ (RHS)

UK: Exchange rates

Source : Haver Analytics

$/£ €/£Referendum

Higher inflation has squeezed the consumer…

3

-6

-4

-2

0

2

4

6

8

1983 1987 1991 1995 1999 2003 2007 2011 2015

OE Spending Power Index

Consumer spending per capita

UK: Consumption & OE Spending Power Index% year

Source : Oxford Economics

Forecast

…while the improvement in the net trade position has disappointed…

4

-8

-6

-4

-2

0

2

4

6

8

10

12

14

2012 2013 2014 2015 2016 2017

Exports

Imports

UK: Goods export & import volumes*%3m-on-3m, yr ago


* excluding oil & erratics

…and the UK has sunk to the bottom of the G7 growth rankings

5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Canada US Germany France Japan Italy UK

G7: GDP growth, Q3 2017% year


Probability 30%

Probability 70%

arrangements

Deal on separation and transitional

Stage 1: Outcome of Article 50

negotiations

Move straight to ultimate UK-EU

relationship in March 2019

Brexit scenario tree – stage 1

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

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

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

UK-EU trade would be subject to sizeable tariffs & NTBs…

9

0% 10% 20% 30%

Food and beverages

Chemicals

Textiles

Motor vehicles

Other manufactures

Aerospace

ICT equipment

Machinery

Metals

Mineral products

Wood and paper

Professional Services

Transport and Comms

Other Services

Utilities and Construction

Goods

Services

Tariff

Customs

Other NTB

UK exports: Tariff & NTBs by sector

Tariff/tariff-equivalent NTB, %Source : Oxford Economics

* Financial services & insurance not shown due to difficulty in quantifying tariff-equivalent NTB

…with the UK far more heavily affected than EU countries

10

46%

15%

9%

9%

8%

8%

7%

7%

7%

7%

6%

5%

3%

14%

0% 20% 40% 60%

UK

Ireland

Cyprus

Netherlands

Belgium

Denmark

France

Sweden

Germany

Poland

Portugal

Italy

Austria

UK: Share of goods exports affected by UK-EU tariffs

Share of total exports, %

Source : Oxford Economics calculations using data from ONS & IMF DOTS

UK exports to countries with a FTA

with the EU

We would expect the consequences of ‘no deal’ to be far worse for the UK

than any other country

11

-0.1-0.1-0.1-0.1-0.1-0.1-0.1-0.1

-0.2-0.2

-0.2-0.3

-0.3-0.3-0.3-0.4-0.4

-0.4-0.6

-1.0-1.8

-2.0 -1.5 -1.0 -0.5 0.0

GreeceAustria

BulgariaFinland

SpainPortugal

ItalyFrance

GermanyBelgium

RomaniaSwedenSlovakia

CroatiaDenmark

PolandNetherlands

HungaryCzech Republic

IrelandUK

Europe: impact on GDP of 'cliff-edge' Brexit

% difference in level of GDP in Q4 2020 relative to baseline


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

Single market 7%

Customs union 13%

FTA 5%

Probability 30%

WTO 70%

UK remains in EU 5%

Single market 10%

Customs union 15%

FTA 50%

Probability 70%

WTO 20%

UK remains in EU 5%

arrangements

Stage 2: Ultimate UK-EU deal

Deal on separation and transitional

Stage 1: Outcome of Article 50

negotiations

Move straight to ultimate UK-EU

relationship in March 2019

Brexit scenario tree

13

Key




Brexit scenario tree – final probabilities

14

Key




Single

market

Customs

union

FTA WTO Remain in

EU

New relationship in place from March 2019 2% 4% 2% 21% 2%

Deals on separations and interim

arrangements, leading into new relationship7% 11% 35% 14% 4%

Total probability of ultimate UK-EU trade deals 9% 14% 37% 35% 5%

Matrix of Brexit scenario probabilities

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

The most likely combination of policy and trade agreement is amongst the

most damaging options…

16

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

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

LIBCUS

LIBBIL

LIBFTA

LIBMFN

POPCUS

MODFTA

POPBIL

POPFTA

POPMFN

UK: Impact of Brexit on level of GDP in 2030% difference compared with remaining in the EU


…though the impact outside of the UK will be limited

17

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

UK Ireland rEU Austria

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

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andrew goodwin - advantage austria€¦ · stage 1: outcome of article 50 ... * financial services...

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