Understanding BrexitJon Neale

Head of UK Research

November 2016

57 Varieties of Brexit

SOFT BREXIT

Norway Option

EEA / EFTA

HARD BREXIT

Full Exit

WTO baseline rules

Is a negotiated middle

ground more likely?

Uncertainty and confusion…

Prepare for an even bumpier ride in 2017

Understanding permutations and implications

• Single Market – relevance for financial services

• Customs Union – benefits manufacturing

• Free Trade Area

• WTO ‘Most Favoured Nation’

4

Implications…

CENTRAL CASE

• 2017: Article 50. Uncertainty for much of the year as negotiations make slow progress given presidential elections in France & Germany

• 2018: Uncertainty begins to clear as relatively benign shape of eventual arrangement begins to emerge. Markets gradually recover

• 2019-2020: Details emerge of a relatively benign deal; demand recovers more strongly against background of limited supply resulting from construction freeze; rental growth returns

UPSIDE CASE: Deal emerges earlier, involving EFTA ‘holding position’ with emergency brake on migration; demand and construction recover earlier but there is still a squeeze in 2018/19

DOWNSIDE CASE: Fractious negotiations followed by further upsets within Eurozone. Britain forced to negotiate WTO membership. Potential re-emergence as safe haven / dynamic global centre in longer term (post 2020)

5

And timescales….

The Defining Issues…

6

London Devolution

Passporting

International Talent

Labour Mobility

Single Market in Goods

Euro Clearing

Heathrow Expansion

Infrastructure

EFTA/EEA Regional Funds

Constitutional Issues

Political Manoeuvring

University Funding

Corporate Lobbying

Regional / Industrial Policy

More Corporate Regulation?

Economic fallout Outlook for slower growth

7

Many commentators continue to see a benign economic impact

IMF “worst case”

assumes fractious

EU negotiations

and default to

WTO rules on exit

UK GDP growth (%) 2016 2017 2018 2019 2020

Oxford Econ. (July forecast) 1.8 1.1 1.4 1.6 2.2

Oxford Econ. (August forecast) 2.1 1.4 1.2 1.5 2.1

Consensus (severe slowdown) 1.9 0.9 N/A N/A N/A

IMF downside (recession) 1.1 -0.8 0.6 1.7 2.6

Consensus forecast reflects an average across several forecasting

houses including: JP Morgan; Barclays; CBI; Goldman Sachs; HSBC and

Lombard Street Research

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Oxford Economics July forecast

Oxford Economics October

Consensus (October)

POSITIVE INDICATORS:

Latest data points to continued growth

35

40

45

50

55

60

65

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Aug2007

Aug2008

Aug2009

Aug2010

Aug2011

Aug2012

Aug2013

Aug2014

Aug2015

Aug2016

SERVICES SECTOR PURCHASING MANAGERS INDEX RETAIL SALES GROWTH (YEAR ON YEAR)

Outlook Latest Indicators Point to Continued Growth…. But investment intentions appear to have significantly weakened

Source: Datastream

Outlook Falling pound will impact on the consumer

9

Inflation to rise throughout the rest of 2016 and into 2017

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CP

I (%

incr

ease

)

Source: Oxford Economics

Outlook Bond yields and interest rates…

10

Further Base Rate cuts…. Gilts to fall even further

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

%

Interest rate, 10 year government bonds Interest rate, central bank policy

Source: Oxford Economics

Why this really is different…

• Occupier markets are much tighter

• More diverse demand profile

• Significant spread above swaps in every sector

• Modest leverage & abundant global equity

• 0bps – 50bps rise in yields depending on sector

• Flattening rather than falling rents

Chronic uncertainty rather than acute shock – to healthier commercial markets….

For Financial Services

620

640

660

680

700

720

740

760

780

800

820

Fin

anci

al C

entr

e C

ompe

titiv

enes

s S

core

12

London has no obvious competition in Europe

Source: Z/Yen Financial Centres Competitiveness Index

Trade Matters | Exports by Destination

0%

10%

20%

30%

40%

50%

60%

70%

European Union Asia & Oceania North America Middle East andNorth Africa

(excl EU)

Western Europe(excl. EU)

Sub-SaharanAfrica

Latin Americaand Caribbean

Eastern Europe(excl EU)

% o

f tot

al g

oods

exp

orts

13

Source: National Statistics

Regional house price growth – year to August 2016

13.312.2 12.1

9.08.4

7.8 7.66.9

6.3

4.94.3

3.0 2.8

0

4

8

12

16E

ast

Sou

th E

ast

Lond

on

Sou

th W

est

UK

Nor

ther

n Ir

elan

d

Eas

t Mid

s

Wes

t Mid

s

Nor

th W

est

Yor

k&H

umb

Sco

tland

Nor

th E

ast

Wal

es

% h

ouse

pric

e ch

ange

in la

st y

ear

Source: JLL, Land Registry

House Prices…

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

Q2

2014

Q3

2014

Q4

2014

Q1

2015

Q2

2015

Q3

2015

Q4

2015

Q1

2016

Q2

2016

Q3

2016

UK London South West

15

London slowdown vs regional stability….

Source: Nationwide

Mortgage Approvals…

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Jan

2011

Mar

201

1

May

201

1

Jul 2

011

Sep

201

1

Nov

201

1

Jan

2012

Mar

201

2

May

201

2

Jul 2

012

Sep

201

2

Nov

201

2

Jan

2013

Mar

201

3

May

201

3

Jul 2

013

Sep

201

3

Nov

201

3

Jan

2014

Mar

201

4

May

201

4

Jul 2

014

Sep

201

4

Nov

201

4

Jan

2015

Mar

201

5

May

201

5

Jul 2

015

Sep

201

5

Nov

201

5

Jan

2016

Mar

201

6

May

201

6

Jul 2

016

Sep

201

6

16

… for house purchase

South West housing transactions

500

600

700

800

900

1,000

1,100

1,200

1,300

50

60

70

80

90

100

110

120

130

Jun

11

Jun

12

Jun

13

Jun

14

Jun

15

Jun

16

South West United Kingdom

Num

ber

of tr

ansa

ctio

ns a

yea

r in

reg

ion

(000

s)

Num

ber

of tr

ansa

ctio

ns a

yea

r in

Eng

& W

ales

(00

0s)Source: JLL, Land Registry

South West development starts and completions

10

11

12

13

14

15

16

17

18

19

Jun

12

Sep

12

Dec

12

Mar

13

Jun

13

Sep

13

Dec

13

Mar

14

Jun

14

Sep

14

Dec

14

Mar

15

Jun

15

Sep

15

Dec

15

Mar

16

Jun

16

Starts Completions

Source: JLL, DCLG

No.

of u

nits

per

yea

r (0

00s)

UKG R O W T H F O R E C A S T S

% C H A N G E P A

2.5%0.5%

3.0%1.0%

3.5%2.0%

3.5%4.0%

4.0%5.0%

Housing and Regeneration Policy | All Change

• New emphasis on rental housing – Build-to-rent and Affordable

• End of Help-to-Buy mortgage guarantee

• Stimulating Supply not Demand

• £3bn Home Building fund

• Focus on SME developers, custom build and off-site construction

• Emphasis on regional economies & regeneration : beyond the Northern Powerhouse

• Infrastructure investment

• Return to regional planning?

20

ENGLAND HOUSING STARTS

FARMER REVIEWS Y M P T O M S

L O W

P R O D U C T I V I T Y

L O W

P R E D I C T A B I L I T Y

S T R U C T U R A L

F R A G M E N T A T I O N

L E A D E R S H I P

F R A G M E N T A T I O N

L O W

M A R G I N S

D Y S F U N C T I O N A L

D E L I V E R Y M O D E L

W O R K F O R C E

S I Z E

L A C K O F

C O L L A B O R A T I O N

L A C K O F R & D ,

& I N V E S T M E N T

P O O R I N D U S T R Y

I M A G E