Pound Sterling to Fall 15% on Brexit - But This is a Good Thing Says Wolfson Prize Winning Economist

The pound could fall some 15% against the dollar in the event of the UK leaving the European Union argues one of he City of London's best-known economists. But, this could be a good thing.

In a recent report entitled: “Short-term costs of a Brexit wouldn’t derail the economy” Economist Roger Bootle and Jonathon Loynes supply a counter-argument to the highly negative press surrounding the potential economic impact of an exit from the E.U.

We take note as Bootle is one of the City of London's most well known economists having won the Wolfson Prize with a team from Capital Economics for his work on the Eurozone economy.

In his assessment of Brexit Bootle notes we would be left with a markedly weaker sterling - but this would actually have benefits.

Politicians across the divide yearn for a rebalancing of the economy whereby manufacturing grows in importance once more; perhaps this is a nostalgic nod to the United Kingdom's former industrial prowess.

Achieving this aim would certainly require a massive upturn in the UK's export competitiveness.

A weaker sterling is almost certainly a reprequisite to a stronger export base as it helps increase the competitiveness of U.K exports.

HSBC and UBS are two forecasters who have suggested the pound will fall to parity with the euro should the UK leave the European Union.

The demand for UK exports would undobtedly surge at what to Europeans would be bargain prices. Arch Brexit-Bears HSBC refuse to admit this however as their position is heavily in favour of the UK staying within the Union.

Such a fall in the pound would also help rebalance the economy which continues to suffer from a wide trade deficit. It is, ironically, this trade deficit that has left the pound exposed to a drying up of foreign investment flows in the event of Brexit.

Inflation is also expected to rise should the Out vote prevail.

"Although the resulting rise in import prices would hit consumers’ real incomes, this should be more than offset over time by the boost a lower exchange rate would give to exports and manufacturing,” say Bootle and Lyones.

Capital Economics also point out that even in the event of an 'out' vote, exit negotiations would take several years, during which time existing arrangements would be kept in place and business would continue, "as usual."

Business Investment Hit Hardest

An expected fall in Business Investment would be one of the biggest negatives for the economy following a UK exit as foreign investors withold investment decisions as they let the dust settle. 

But the report points out that given investment only accounts for 10% of GDP, and only 10% of that is associated directly with the E.U, only a 1.0% fraction of the economy would likely feel the pain:

"So even if this EU-related business investment halved, this would knock 0.5% off overall GDP – significant, but not catastrophic."

We have meanwhile heard from the world's biggest asset manager, BlackRock, that a UK exit would see major firms move their operations to the continent, something that will threaten jobs, particularly in the financial sector.

Rather than there being a mass exodus, Bootle and Lyones argue many euro-centric operators would remain in the U.K regardless:

“Many of those firms dependent on European markets would just decide that they would continue operating in the UK as normal, regardless of how EU negotiations concluded.”

The report dismisses the argument that a Brexit would push up the cost of borrowing more generally, hurting a wider array of companies.

Arguing instead that the impact on borrowing costs would be offset by companies using their considerable stockpiles of reserves to fund business investment instead. 

“Business investment has been recovering for a while, despite firms’ net recourse to external finance only turning positive in the last year or so.”

Property Investment from overseas would likely be heavily affected by a Brexit, however, this would be offset by the weakening pound, which would continue to create value for outside investors.

On Growth and Monetary Policy

Overall the net pass-through to growth would be a decline of about 0.05%, with growth in 2015 probably falling to a little below 2.0% instead of current estimates of 2.2% and growth, "a little bit below our forecast of 2.7%" in 2017.

Monetary Policy would probably be left unchanged or tightened due to the falling pound pushing up import inflation.

"Most likely in our view is that a Brexit would simply reinforce the case for leaving interest rates where they are. Indeed, it would make our current forecast for a November rate hike more testing and boost the chances of a rate rise being delayed until 2017."