Thursday 28 Mar 2024
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SINGAPORE (June 28): BNP Paribas’ economic research department has revised its forecasts down by about 0.3pp this year and almost 1.5pp for 2017, with additional expectations of 2018 growth to be “marginally lower than previously assumed”, as the level of GDP is almost 2% lower than previously forecast.

This comes after United Kingdom’s historic vote to leave the European Union (EU) last Friday.

In a report out on the same day, BNP Paribas group chief economist William De Vijlder cautions that these forecasts are, of course, “significantly more uncertain than normal”.

In a nutshell, here is what De Vijlder says may happen in the years to come:

1. A second Scottish independence referendum, which was “highly likely” according to Scotland’s First Minister, Nicola Sturgeon. Such an instance would add to what De Vijlder calls a “relatively unstable domestic political situation” over the years.

2. Markedly weaker investment as a result of heightened uncertainty and financial-market volatility.  

3. Corporate retrenchment is also likely to occur with reduced job creation and higher unemployment.

4. Upward pressure on inflation via import prices, assuming a 10% persistent fall in the sterling relative to its trade-related value at the end of May.

5. Real wages will be squeezed due to lower nominal wage growth and higher inflation. BNP Paribas says real wages are expected to stagnate in 2017, and to rise only modestly in 2018.

6. Notably weaker consumer spending than had the UK opted to remain in the EU.

7. Policy easing by the Bank of England, specifically a reduction in the bank rate to zero from 50bp. BNP Paribas also expects the bank to activate its liquidity measures, and up its asset purchases by £100 billion (S$180.3 billion).

Despite the mostly negative outlook, De Vijlder also mentions there could be “some potential gains from an exit that could soften the impact”.

These include a reduction, or an end to the UK’s contribution to EU budget should it end up as a European Economic Area (EEA) member; greater control over regulation, which could raise productivity and supply-side potential; as well as increased competitiveness with the weakening of the sterling.

In De Vijlder’s opinion, the above-listed situations will not be happening any time soon, even if his predictions should prove to be accurate. This is because BNP Paribas believes the actual process of the UK’s departure from the EU is going to be protracted.

It is “unlikely” that the UK government will officially notify the European Council of its intention to withdraw before the end of this year, says De Vijlder.

Following the notification when it does happen, negotiations for a withdrawal agreement are given a firm two-year deadline – leaving the UK bound by EU law until then.

The group chief economist asserts that even coming to such an agreement within the two-year period will be “challenging” due to the trade ties between the UK and EU, the breadth of EU-related UK legislation, and the citizenship status conundrum of EU citizens residing in the UK, and vice versa.

“There is also the need to forge trade deals with over 50 non-EU countries that the UK currently trades with on the basis of agreements signed by the EU,” he adds. “Trade negotiations are typically long processes.”

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