Wailing Banshees

Over 2 years ago, when it first became apparent that we would be leaving the EU, commentators described the potential exit options through reference to various countries that operated under those models. Most talked about was the Norway (EEA) option, but there were also Swiss and Canadian (FTA) and Turkish (Customs union) models. With six months to go, the rhetoric has shifted towards choices between ‘Disorderly’ and ‘Chaotic’ exit options. Whilst no-deal outcomes are still considered to be a minority probability, the lack of concrete progress towards a viable alternative, combined with the potential impact of such an exit, throw these outcomes into the spotlight. This week the IMF and the Chancellor have added their warnings to that of Mark Carney over the impact of a disorderly no-deal. The latter’s comments that it could result in a house price fall of 35%, have grabbed headlines and political backlash (Rees-Mogg describing Carney as a ‘wailing banshee’), but have been largely misrepresented. Carney was articulating the stress test limit for a severe economic shock, representing a worst case scenario rather than a forecast. It is also worth putting this into context. During the GFC average house prices fell by 20% over 16 months. This time around, sterling has on expectation already been repriced to at least a degree of what might be its final fall. One might also question what the response of the Bank of England would be in the event of an economic shock. Carney has been quick to point this week to the success of quantitative easing applied in 2008 in the wake of the last economic shock. Whereas the bank rate glide path is upwards, a movement in the other direction remains an option.