Brexit Scenarios: Consensus of 14 Economic Analysts

Given the current large degree of uncertainty over the evolution of Brexit, this month we polled our panelists in order to shed some light on the issue. We asked panelists for the probability they assigned to different Brexit scenarios, and the UK’s future growth prospects in each of these scenarios. 

The 14 FocusEconomics panelists who took part in our survey currently see a negotiated deal as by far the most likely outcome to the Brexit process, given most MPs are against no deal, and that another referendum would take time to organize and currently commands no clear majority in parliament. However, panelists are split over the shape of the deal, and both no deal and no Brexit are still possible. Given the speed of political developments, the different probabilities are likely to oscillate substantially in the weeks and months ahead.

“Finding a way forward will be no mean feat, with all of the options currently being discussed […] presenting significant challenges. Leaders on both sides of the Channel (particularly on the UK side) are in crisis mode and all options […] remain firmly in play.” 

- Analysts at Nomura

The UK leaves the EU with Theresa May’s deal 

Leaving the EU with Theresa May’s deal would provide muchneeded certainty to businesses and consumers, boosting investment and private consumption. A transition period lasting until at least December 2020 would kick in, during which time the UK-EU trading relationship would remain unchanged. The UK and the EU would negotiate a new trading relationship which would eventually see the UK leave the Customs Union and the Single Market. Under this scenario, our panelists see growth picking up in 2019 and 2020 relative to the likely 2018 outturn.

“Business survey evidence suggests that Brexit-related uncertainty has been a key factor behind the recent [economic] weakness, particularly in terms of business-to-business spending. But if Brexit proceeds in an ‘orderly’ fashion – as we expect – this drag should fade”

- Andrew Goodwin, Associate Director at Oxford Economics

“A Brexit deal should herald an investment surge”

- Kallum Pickering, Senior Economist at Berenberg.

The UK leaves the EU with a different deal 

Leaving the EU with a different deal would likely imply a softer Brexit. For instance, changes to the political declaration could be made setting out plans for a customs union, or continued membership of the Single Market. As with Theresa May’s deal, this would provide an immediate boost to the economy as reduced uncertainty unlocks more investment and consumption.

Moreover, the pledge to pursue a closer trading relationship after the end of the transition period could entice more investment this year and next compared to Theresa May’s deal. On the other hand, a different deal could take longer to agree on and ratify; this could necessitate an extension of Article 50, aggravating uncertainty in the near term. Our panelists currently see growth under this scenario marginally stronger than May’s deal. 

Our panelists see a no-deal Brexit providing a substantial headwind to the economy in 2019. Exports, investment and private consumption would likely suffer significantly. However, panelist forecasts vary notably, as the impact of no-deal will depend on whether some sector-specific agreements are reached with the EU (a so-called managed no deal), and the degree of policy support. Our panelists see the economy recovering slightly in 2020, but remaining weak.

“No Deal Brexit will result in severe disruption in supply chains. Consumer spending will dramatically slow amid inflationary pressures, higher tariffs on goods and services, slower credit growth, tax hikes, coupled with uncertainty about EU citizens’ rights.” 

- Athanasia Kokkinogeni, Europe Analyst at Frontier Strategy Group

“We believe that the 2019 impact would be large due to delays at the ports and thus cause a large supply-side shock alongside financial market effects and sterling depreciation.”

- David Page, Senior Economist at AXA Investment Managers

“We assume that policymakers would react by loosening both monetary and fiscal policy in order to cushion the blow, which should mean that while the UK briefly flirts with recession in mid2019, it then gradually recovers.”

- Andrew Goodwin, Associate Director at Oxford Economics

The UK remains in the EU 

Our panelists see this scenario as the most positive for the economy, as firms would continue to enjoy unimpeded access to the EU market, and uncertainty over the future shape of the trading relationship would disappear. However, growth in the near term would hinge on how long it takes the UK to reverse its decision to leave the EU. For instance, a referendum would presumably need to be called first; this could take around six months to prepare, prolonging uncertainty in the near term.

“A referendum, […] could become the only way out of the mire if there was still an impasse in the UK parliament at the eleventh hour. […] Going forward the market reaction will depend on the referendum question and in particular, whether no-deal is an option on the ballot paper.”

- Economists at Unicredit

The long-run outlook 

Our panelists’ consensus is that the greater the degree of economic integration between the UK and the EU, the higher the UK’s long-run potential growth rate. 

Date: January 31, 2019