October 12, 2018

The fall-out of a Crash Brexit

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In Short

The Brexit negotiations have reached their endgame which increasingly resembles a roller-coaster ride.
The fall-out of a Crash Brexit
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Highlights:

  • The latest encouraging signals from Brexit negotiations support our base case of an orderly EU departure of the UK. Risks of a no-deal divorce remain non-negligible, though, especially when it comes to UK parliament ratification.
  • In this risk case, the UK would fall into recession, while euro area growth would fall below potential. Barring policy responses, GDP would be down by 4.2 pp in the UK and 0.9 pp in the euro area by end-2020 vs an orderly Brexit.
  • The BoE may ease again, though Carney has warned that this time around rising inflation would be hard to ignore. The ECB would postpone its first key rate hike to end-2020.
  • The gloomier economic outlook and risk-off mode would induce a drop in Gilt yields and a bull-flattening of the Bund yield curve. Spreads on credit and Southern European sovereign debt would widen.
  • Rising uncertainty would drive equity risk premiums higher causing share prices to drop sharply. The British pound would slide, with the EUR/GPB likely reaching parity, while the USD would strengthen.

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