Britain leaving the European Union — Brexit — will not be as big of a deal as everyone thinks, says the chief economist at research firm Capital Economics.
Despite dozens of investment banks, think tanks, and political organisations predicting that Brexit will destroy the markets and hinder economic growth, Julian Jessop of Capital Economics says in a new research note that the impact of the UK severing ties with the 28-nation bloc is likely to be a “damp squib.” Jessop writes:
There are good reasons to believe that the market fireworks after a UK vote to leave the EU (‘Brexit’) would not be as dramatic as many expect. Indeed, while the initial impact on the pound would almost certainly be negative, there are several factors that might limit the downside for sterling too.
That is a pretty bold statement. The pound craters every time there is a poll that shows that the support for a “Leave” vote is gaining momentum. This has led to research houses or investment banks such as Morgan Stanley to warn that a Brexit would devastate the markets in six months.
1. The negative market reaction so far is not what you think it is — Jessop argues that the nervousness from the markets is a reflection of investors’ uncertainty over what the results will be from the referendum, not because investors think there will definitely be a Brexit. He believes that market volatility will calm down when the result comes out on June 24.
2. A Brexit vote will not mean Britain immediately leaves the EU — Jessop points out that even if there is a vote for Britain leaving the EU, “the result of the referendum would only be advisory” and “the UK would probably remain a member of the EU for several years.” In other words, nothing will change much for ages. Jessop adds that in that time, there will be heaps of negotiations “to clear up some of the most important uncertainties about the wider impact” and therefore investors will turn their attention elsewhere while the UK sorts it out.
3. The “Remain” camp will stop scaremongering — Jessop said that if there was a Brexit, “the rhetoric of global policy-makers is likely to change.” He believes that if there was a “Leave” vote, then the doomsday predictions from the “Remain” side will be brushed aside and would “expect them to seek to reassure businesses and investors instead.”
As a result of these three factors, Jessop believes markets will calm down after a Leave vote rather than nose-diving as many have predicted. We may well get to see who is right — the latest polls from both Survation and Ipsos Mori showed big swings towards the Leave campaign.
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