© Peter Vanden Houte
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I believe that in a first instance it will indeed be very negative: not as negative as for the UK itself, though. According to the research we have conducted within ING, we believe that there will be some demand shock in the UK and, as a result, depreciation of the Pound Sterling. Thus, it will definitely shave off some growth in the UK this year and probably also next year.
The situation itself will also have a negative impact on the Euro zone, given the fact that a number of countries export towards the UK, while less demand in the UK and a weaker Pound will definitely hit also European exports towards Britain, which is the first negative effect.
However, I suppose we also need to take into account the psychological negative effect, because it could cause some turmoil on financial markets and, as a consequence, it might hit sentiment in the Euro zone, which could also be a drag on economic growth going forward.
By these two challenges – demand shock and at the same time also sentiment shock – we would figure that it could shave off 0.3% of European growth. It is not sufficient to push the Euro zone in recession, but it will definitely slow down growth in the coming years. To my mind, there is no doubt that the short term impact will be negative. Talking about a longer term impact, if we look three to five years forward, of course the demand shock will have disappeared, and then the question is what the Euro zone and the EU will look like without the UK.
Thus, I believe there are two consequences: one of them is positive and another one is negative. The positive one is that some investment that was previously directed to the UK will now probably be directed towards the European continent, given the fact that there will be some uncertainty over market access for British companies on the Continent. Hence, I suppose that foreign investors will perhaps invest rather in the Continent then in the UK. Moreover, we also see a number of European banks that already have
announced they will move some of their activities out of London towards the European continent on the back of ‘Brexit'. In terms of investment it might be a positive impact for Europe, but on the other hand, we do not have to forget that the political balance within the European Union will be shifted because of the departure of the United Kingdom. Therefore, this by itself could be perhaps more negative. We must not forget that the UK has always been a very market-driven economy and has always pushed the market agenda within the EU. Without the UK the emphasis on the market is a bit less, which might be negative for growth in the long run. Bottom line in a short term is definitely a negative phenomenon, potentially shaving off 0.3% from the Eurozone growth.
What are your expectations for EUR/GBP for the next half of the year?
That pretty much depends on how we see the Brexit story, because we have already seen that now, with the uncertainty that has been created since the announcement of the referendum, the Sterling has lost a bit against the Euro. We believe that in the coming months the Sterling will fall to 0.80. In case the uncertainty surrounding the referendum reaches its maximum surge towards June, we might be hovering around 0.80. However, if afterwards the Brits would vote against the ‘Brexit', it could see the Sterling strengthen again to 0.76 against the Euro, which is our present forecast, because we believe that the "stay" camp will win the referendum, which means that after this period of uncertainty the Sterling will strengthen. Having said that, if we are wrong and the ‘Brexit' will happen, we believe the Sterling will fall at least to 0.90 against the Euro in the course of this year.