The referendum on whether or not to stay in the EU is the UK’s main political event of 2016.
It’s hard to predict with any accuracy the economic and financial effects of the referendum given uncertainty of its outcome and the fact that an exit from EU would be unprecedented.
With this in mind, Credit Suisse analysts Sonali Punhani and Neville Hill have put together a weighty research note to try and answer the question of how the UK economy would be hit in the event of a Brexit.
The answer: very badly.
Here’s a quote from the report (emphasis ours):
Overall, the vote to leave the EU would entail an immediate and simultaneous economic and financial shock for the UK. We are likely to see an immediate contraction in GDP, which can be seen as a front-loading of the fall in UK national income that leaving the EU would imply for the UK.
In the medium term, we expect it to be negative for both UK demand and supply implying a weaker GDP growth path. The recovery from the snap recession is likely to be more muted, making the GDP level post leaving meaningfully lower than if the UK votes to stay.
Credit Suisse estimates that UK GDP could immediately fall by up to 2 percentage points if the country voted to leave the EU. And it would never really recover.
Firstly, a lot of companies would move workers overseas. More than a third of employers surveyed said they would be likely to shift staff out of the UK. Here’s the chart:
The UK would lose its status as a hub for bright European things and companies depending on top talent would start to look elsewhere.
On Monday, top pharmaceutical executives echoed this fear, warning that a Brexit would “isolate the country’s scientists,” according to a report in the Financial Times.
Secondly, the current account deficit, already hovering close to 5% of GDP, would balloon further as foreign direct investment from the EU tails off. As a result, the analysts say the pound would fall in value, making imports more expensive and stretching household incomes.
Here’s what that looks like:
While all this might be scary, according to Credit Suisse, it is unlikely. As the polls stand, more people are planning to vote to stay rather than leave the EU.
Here’s that chart:
Businesses and business leaders have been taking strong positions on either side of the debate. Goldman Sachs and JPMorgan are pouring cash into the campaign group fighting to keep Britain in Europe, ahead of a referendum on the issue that could come as soon as this summer.
The banks are donating to campaign group Britain Stronger in Europe, led by Stuart Rose, the former CEO of Marks & Spencer, putting themselves in opposition with fund managers who prefer to leave the EU.
Sir Michael Hintze, who founded hedge fund CQS back in 1999, is believed to have backed the anti-EU Vote Leave group and Crispin Odey, the founder of hedge fund Odey Asset Management, is also backing the campaign.
While the vote could be held as late as 2017, many analysts think June 2016 is more likely if Prime Minister David Cameron’s negotiations with the EU on concessions are successful next month.
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