Brexit: current situation and outlook

Almost three years on since the Brexit referendum and two since the intense negotiations between the parties began, the failure by the British Parliament to ratify the November 2018 agreement between the UK Government and the other EU governments has led to a situation of great complexity. With only a few days remaining until the deadline for withdrawal, no consensus plan has emerged yet. Without an alternative plan, a no-deal exit is – excepting postponement – the current default option. This Occasional Paper takes stock of the current situation and outlook for Brexit (i.e. the process of UK withdrawal from the EU) by drawing together a number of studies produced at the Banco de España in connection with the regular monitoring of the process and its potential effects on the Spanish economy. After noting where the current negotiations stand, the paper reviews UK economic developments since the surprise result of the referendum was announced in June 2016. It further lays out the medium-term outlook for the British economy, which hinges crucially on both the type of future trade relationship to be agreed between both areas and the degree of disruption caused by the withdrawal process. As regards Spain, the paper analyses several issues related to its trade and financial exposures to the UK and also provides estimates of the potential effects of Brexit on the Spanish economy under various hypothetical scenarios using the MTBE (i.e. the quarterly macroeconometric model of the Spanish Economy regularly used at the Banco de España for forecasting and policy analysis). Finally, mention is made of the contingency measures adopted, within their respective remits, by the European Commission and the Spanish Government, in the event of an abrupt no-deal exit.