Andrew Goodwin - Advantage Austria€¦ · Stage 1: Outcome of Article 50 ... * Financial services...
Transcript of 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
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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…
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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…
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0
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4
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2012 2013 2014 2015 2016 2017
Exports
Imports
UK: Goods export & import volumes*%3m-on-3m, yr ago
Source : Haver Analytics
* excluding oil & erratics
…and the UK has sunk to the bottom of the G7 growth rankings
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0.0
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1.0
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2.0
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Canada US Germany France Japan Italy UK
G7: GDP growth, Q3 2017% year
Source : Haver Analytics
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
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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
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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
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UK-EU trade would be subject to sizeable tariffs & NTBs…
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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
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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
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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
Source : Oxford Economics
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?
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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
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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
Brexit scenario tree – final probabilities
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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
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
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The most likely combination of policy and trade agreement is amongst the
most damaging options…
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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
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-1.5
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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
Source : Oxford Economics
…though the impact outside of the UK will be limited
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UK Ireland rEU Austria
Impact on level of GDP in 2030 for POP FTA* scenario% difference compared with remaining in the EU
Source : Oxford Economics
* POP FTA = Populist policies & a UK-EU free-trade agreement
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