Capital Economics: Brexit outcomes remain either deal, no deal or repeated delays

According to Capital Economics, the possible permutations are now: deal, no deal or repeated delays. Amy Wood, Property Economist, at Capital Economics wrote:

“Each have different near-term implications. But, by 2021, under any scenario, we think that the economy could be growing at around 2% y/y. Nevertheless, we still believe that the economy is well placed to cope under any scenario. In particular, this reflects recent commitments by both Conservative candidates to loosen fiscal policy whether there is a deal or not.

“That said, we would still expect Bank Rate to be cut under a no deal. But, with the economy near capacity, any fiscal stimulus is likely to boost inflation. As a result, in a deal or no deal, we think this would require higher interest rates than might be the case without this stimulus.

“The main difference for property capital values under each scenario is how uncertainty and interest rates affect property yields. If a deal is secured, increased clarity would reduce upward pressure on yields this year. But we would still expect yields to rise next year as interest rates increase.

“In contrast, a no deal would cause yields to spike temporarily. Nevertheless, in this scenario, slightly lower interest rates over the next few years would keep yields lower than otherwise after the initial disruption. If Brexit is repeatedly delayed, uncertainty would remain and yields would continue to climb in the near-term.

“But if the delay is long enough and the yields have risen sufficiently, investors may look through this uncertainty, as they did from 2016 to 2018, and the Bank of England could increase interest rates next year anyway, albeit more slowly than under a deal. By 2021, however, we expect property yields to be at similar levels under all scenarios.”

Capital Economics estimated the negative cumulative impact on all-property capital value growth of between 8% under a deal and 9% for a no deal over the next three years.

To read Capital Economics full investment note, please click here.

james.wallace@realassetmedia.com