HSBC says Brexit need not be unmitigated disaster, pound falls

Sterling dropped below the psychological 1.40 mark versus the US dollar on Wednesday morning, with HSBC warning of the risk of a large disruption to economic activity at least in the short-term, although on a longer time-horizon there might be benefits to be had.

If Britons decided to exit the European Union, that could lead to a large drop in the value of the pound this year and brake economic growth significantly, HSBC said in a research report sent to clients.

At present, foreign exchange markets were pricing in a roughly 33% probability of a Brexit, but should that crystalyse into certainty (a 100% chance) it could push the pound down by between 15-20% versus the US dollar - down to early 1980s levels - and towards parity with the euro in the aftermath of a 'Brexit' vote.

In turn, that could push inflation higher by five percentage points and raise import prices for firms, the broker said. HSBC´s current 2017 forecast - on the basis of no 'Brexit' - for the consumer price index was 1.8%.

The rate of growth in gross domestic product could also be lower by between 1.0 and 1.5 percentage points, roughly halving HSBC´s forecast for GDP growth of 2.3% in 2017, with the Bank of England likely staying put - although interest rate cuts were possible - and opting to 'see-through' the inflation spike.

Among some of the other potential economic implications of Brexit the broker listed were:

1. Sectors with a large proportion of non-British EU workers could face higher labour costs notably in retail, construction, airlines and facilities management.

2. Uncertainty could hit UK bank stocks, although they should be relatively well placed to weather a growth slowdown.

3. A reduction in passenger traffic might affect airlines and corporate structures might need to change if the UK left the single EU aviation market.

However, on a longer time frame 'Brexit' might be a positive, the economists said, "if it allowed the UK to ‘cherry pick’ immigrants from all over the world and forge new trading partnerships," HSBC added.

"We think [the UK] would eventually achieve a strong economic performance in or out of the EU. The unknown is how economically destructive and drawn out the transition phase would be."

"Immigration raises trend growth and is needed to help close the public sector budget deficit: lower inflows could have long-term consequences."

As of 08:42GMT cable was slipping 0.21% to 1.3988, while the European single currency was gaining 0.24% against sterling to 0.7879.