Analysts at Goldman Sachs are warning that sterling could fall by up to 20 per cent if Britain votes to leave the European Union, reports The Guardian.
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 believe a vote to leave would alarm foreign investors and put them off injecting capital into Britain, placing pressure on the current account deficit.
Analysts George Cole, Robin Brooks and Michael Cahill wrote in a research note: “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.”
They estimated that a Brexit vote could lead to a short-term drop in trade-weighted sterling of 15-20 per cent. This would take the pound down to $1.15-1.20 from $1.4565 at the moment, and push the euro up to 90-95p from 76p.
The Goldman team said: “We argue that, if the UK voted to leave the EU, the UK’s current account deficit would still be a source of vulnerability despite some recent improvement. An abrupt and total interruption to incoming capital flows in response to a ‘Brexit’ could see the pound decline by as much as 15-20 per cent.”
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.
Britain’s current account deficit has narrowed over the past year to 3.7 per cent of GDP from 6 per cent. Since November, the pound has fallen 5% as expectations that the Bank of England will raise interest rates this year have receded, and the Brexit debate started to heat up.
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 per cent of GDP 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 at 68p 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.
