Brexit could slash sterling by 20%, warns Goldman Sachs

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Analysts at Goldman Sachs are warning that sterling could fall by up to 20% if Britain votes to leave the European Union.

While the US investment bank believes Britain will remain in the EU, its macro markets strategy team has looked at what would happen to the pound if the Brexit vote goes the other way.

They claim an interruption to the flow of foreign capital into the UK would be likely, with knock-on effects for Britain’s current account deficit.

Analysts George Cole, Robin Brooks and Michael Cahill, wrote: “A vote for the UK to exit from the EU is an event that would increase uncertainty, weigh on the UK outlook and raise concerns of foreign investors – potentially interrupting the flow of capital to the UK, sending the pound much lower.

“We can estimate the potential magnitude of a move [in sterling]. One way to do this is to assume that a ‘Brexit’ decision causes an interruption to capital flows into the UK that forces a sharp closure of the current account deficit, admittedly a strong assumption.”

They estimated this could lead to a short-term drop in trade-weighted sterling of 15-20%. This would take the pound down to $1.15-1.20 and the euro up to £0.90-0.95.

Last week, the Bank of England governor, Mark Carney, warned that concerns about Brexit could test “the kindness of strangers” – with the UK dependent on inflows of foreign capital to fund its hefty current account deficit with the rest of the world.

The Goldman team noted that the pound tumbled 20% on a trade-weighted basis during the global financial crisis between July 2008 and March 2009, and the current account deficit moved from 3.4% of GDP – similar to the current deficit – to virtually zero.

However, the analysts added that their forecasts are “based on a view that the UK will remain in the EU and that, as a result, the underlying dynamics will remain solid in the UK economy”. They continue to forecast the pound at $1.40 and the euro-sterling exchange at £0.68 in 12 months’ time.

Goldman Sachs is backing the Britain Stronger in Europe campaign and has made a substantial donation, believed to be a six-figure sum.

Powered by Guardian.co.ukThis article was written by Julia Kollewe, for theguardian.com on Thursday 4th February 2016 09.50 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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