International Monetary Fund - Brookings · PDF fileInternational Monetary Fund September 15, 2016 The Impact of Brexit Fall 2016 BPEA Conference Maurice Obstfeld Economic Counsellor

International Monetary FundSeptember 15, 2016

The Impact of BrexitFall 2016 BPEA Conference

Maurice ObstfeldEconomic Counsellor

10-year government bond

yields(percent)

Equity markets(index; June 23, 2016 =100)

-3

-2

-1

0

1

2

3

Jan-16 May-16 Sep-16

Nominal Real

9/7

Brexit

Vote

Sources: Haver Analytics, and IMF staff estimates.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-16 May-16 Sep-16

iBoxxBBB 7-10 years

iBoxx A 7-10 years

iBoxx AA 5-10 years

iBoxx AAA 7-10 years

9/7

Brexit

Vote

Quick equity recovery and lower bond yields

Corporate bond yields(percent)

80

85

90

95

100

105

110

115

Jan-16 May-16 Sep-16

FTSE 100 FTSE 350

Brexit

Vote

1

9/7

Change

after

June 23:

+8.0%

+7.3%

Change

after

June 23:

-72 bps

-31 bps

Change

after

June 23:

-45 bps

-31 bps

-20 bps

-28 bps

85

90

95

100

105

110

115

120

2010 2012 2014 2016

Last obs.:

Aug. 16

Brexit

Vote

UK exchange ratesManufacturing PMIs(SA, 50+=Expansion)

2

Sentiment has deteriorated and sterling is down

40

45

50

55

60

65

70

2010 2012 2014 2016

Services Construction

Aug. 16

Brexit

Vote

Sources: Haver Analytics, and IMF, Global Data Source.

80

85

90

95

100

105

110

115

120

125

1.2

1.3

1.4

1.5

1.6

1.7

1.8

2010 2012 2014 2016

U.S. dollar per U.K. sterling pound

NEER (index; Jan. 1, 2010=100; rhs)

9/9

Brexit

Vote

Economic sentiment(index; long-term average=100)

56

57

58

59

60

61

62

4

5

6

7

8

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Temporary employees as a percent of all employees

Employment rate: aged 16 and over (rhs)

Jun. 16

Brexit

Vote

New export orders PMI and real

effective exchange rate

Labor markets(percent)

3

Sources: Haver Analytics and IMF, Global Data Source.

Labor indicators steady and some trade improvement

70

80

90

100

110

120

35

40

45

50

55

60

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

New export orders (SA, 50+ = Expansion)

REER (index; Jan. 2000=100; rhs)

Aug. 16

Brexit

Vote

2017 1/2016 1/

4

Source: Consensus Economics; and IMF, World Economic Outlook..

Note: 1/ Revisions are reflecting the change in forecasts between the pre-Brexit vote vintage and the most recently available vintage.

Current forecast revisions after Brexit vote

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

Bank o

f A

merica -

Merr

illB

arc

lays

Beacon E

con F

ore

casting

Capita

l E

conom

ics

Citig

roup

Econ Inte

lligence U

nit

Econom

ic P

ers

pe

ctives

Experi

an

Gold

man

Sachs

HS

BC

IHS

Econom

ics

ING

Fin

ancia

l M

ark

ets

ITE

M C

lub

JP

Morg

an

Liv

erp

ool M

acro

Resea

rch

Lo

mba

rd S

tre

et R

esearc

hN

IES

RN

om

ura

Oxfo

rd E

conom

ics

RB

SS

chro

ders

Socie

te G

enera

leU

BS

UniC

redit

Consensu

s (

Mean)

Consensu

s (

Media

n)

IMF

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

Bank o

f A

merica -

Merr

illB

arc

lays

Beacon E

con

Fore

casting

Capita

l E

conom

ics

Citig

roup

Econ Inte

lligence U

nit

Econom

ic P

ers

pe

ctives

Experi

an

Go

ldm

an S

achs

HS

BC

IHS

Econom

ics

ING

Fin

ancia

l M

ark

ets

ITE

M C

lub

JP

Morg

an

Liv

erp

ool M

acro

Resea

rch

Lo

mba

rd S

treet R

esearc

hN

IES

RN

om

ura

Oxfo

rd E

conom

ics

RB

SS

chro

ders

Socie

te G

enera

leU

BS

UniC

redit

Consensu

s (

Mean)

Consen

su

s (

Media

n)

IMF

Brexit: Summing up impact

How do we interpret the better-than-expected financial market

developments?

Will they be unwound? No obvious reason, until new negative data emerge

Has the exchange rate saved the day? It has helped (exports, UK debt

denominated in sterling)

House prices? Slowdown in rate of growth; BoE backstop (support to bank

lending channel, eased countercyclical buffers, lower interest rates, and QE)

Uncertainty effects will be prolonged

Can’t negotiations quickly dissipate uncertainty? Not likely given French and

German electoral calendars, U.K.’s lack of preparedness for referendum result

U.K. macro policies, including fiscal easing, can be helpful

But uncertainty effects will also impact the EU-27, with little policy space

5

Brexit: Structural factors and political fallout

How will structural factors play out? Unclear, supply likely affected

What type of deal will be struck with EU? Unclear. EEA unlikely due to lack of

migration control. But access to single market crucial for exports

How will the financial sector be affected? Other key exporters (e.g. car

manufacturers, Airbus suppliers)? Depends on access to single market. U.K.

financial passport a very likely casualty, City of London’s status in peril

Will migration into U.K. slow down sharply? At some point; in the short run, we

may see a surge in migrants from EU-27 before restrictions come into play

What further political repercussions?

Too good a deal for the U.K. would further encourage centrifugal forces in EU

Could the U.K. reconsider? Seems difficult given current political disarray….

Serious re-think needed on a range of EU, euro area arrangements

6