Economists’ forecasts: Brexit would damage growth
We’ll send you a myFT Daily Digest email rounding up the latest Currencies news every morning.
There are few issues that unite UK economists but Brexit is one of them: they overwhelmingly believe leaving the EU is bad for the country’s economic prospects.
In the FT’s annual poll of more than 100 leading thinkers, not one thought a vote for Brexit would enhance UK growth in 2016.
Almost three-quarters thought leaving the EU would damage the country’s medium-term outlook, nine times more than the 8 per cent who thought the country would benefit from leaving. Less than 18 per cent thought it would make little difference.
One of the greatest reasons for economists fearing a vote to leave is that it would spark huge uncertainty, which stops companies investing and households spending, harming growth.
Adam Posen, president of the Peterson Institute for International Economics said the “huge self-inflicted wound” of a vote for Brexit “changes my views about 2016 and the medium term drastically for the worse. Business investment will dry up rapidly.”
Many feared the consequences for financial markets would be severe. Don Smith, deputy chief investment officer at Brown Shipley, said: “The uncertainty generated by a decision to leave the EU would undoubtedly be damaging for sterling assets across the board and, indeed, the value of sterling on foreign exchanges. Consumer confidence would be lower, business confidence and investment intentions would also very likely be negatively impacted.”
Most of the 36 per cent of economists saying there would be little impact in 2016 came to that view because they thought a vote would come too late to materially affect the year’s economic data.
Gavyn Davies, Chairman of Fulcrum Asset Management, was typical in saying, “the referendum will not make any major difference to 2016 views. However, a No vote would lead to a sharp drop in growth in 2017, due to political uncertainty, worries about Scotland’s status inside the UK, an upheaval in the financial services industry, and a major drop in inward capital flows into the UK.”
Further into the future, where opinion was even more strongly opposed to leaving the EU, concerns were centred on the risk that many international companies would no longer choose Britain as a base for their European operations and that the suggested benefits of new trading relations with emerging economies were something of a mirage.
John van Reenen, director of the Centre for Economic Performance, said: “In addition to a loss of trade there will be a loss of foreign investment and less inward migration from highly talented Europeans who have aided UK growth. The idea that we’ll be able to strike lots of new free trade deals with other countries being free from EU is fantasy, as is the idea that there will be some bonfire of red tape that lights up UK growth.”
Stephen King, adviser to HSBC, noted that Britain’s economy had “flourished” in the EU. “Footballers that leave clubs where they have done well have sometimes underperformed thereafter: just think of Fernando Torres at Liverpool and then at Chelsea. Could the UK be heading the same way?” he asked.
Others worried that new freedoms to set regulations might harm competitiveness and growth. Ricardo Reis, professor of economics at London School of Economics, said that while leaving “could allow for some policy improvements, it would also open the way for a whole list of dreadful policies regarding trade, immigration, and industrial policy that membership in the EU now precludes”.
The small minority who thought the UK would benefit from an exit tended to think that any freedoms would be used to foster a more prosperous society, rejecting Prof Reis’s concerns.
Gerard Lyons, economic adviser to Boris Johnson, mayor of London, said the best outcome was being a member of a “truly reformed” EU, but if that was not possible, “the choice may be a stark one, between the UK being in an EU that is inward looking [and] insular, as the EU’s share of the world economy shrinks, or outside, trading with the whole world including Europe, negotiating our own, better suited, trade deals with a focus on what the UK is good at”.
*Full text of answers to the question
Q2: If the British electorate vote to leave the EU in 2016, how would that: a) change your views about prospects for next year? b) Change your views about medium-term prospects?
In the short run it won’t make any difference, not least because we won’t be sure what it means.
In the medium term it will, not least because people won’t know what it means. Hard to expect Nissan to invest in Sunderland when they don’t know what Brexit means, when it will happen, etc.
It would dampen my views for 2016 but not alter those for the medium term. Indeed, it might marginally improve the longer-term outlook. The short term would inevitably see considerable uncertainty — about the reaction of the Scots, the terms of an exit and the consequences particularly for financial services trade. But in the longer term, the exit of the UK would probably not make a great difference to the direction and scale of UK trade, especially with Germany, which would want Britain to remain a market open to its exports.
At a high level it is difficult to see any big positive impacts for the UK economy from a vote to leave the EU, while it is easy to see plenty of potential negative impacts. The immediate impact next year would most likely come through a sharp increase in business uncertainty, delayed investment and potentially currency volatility. Medium term prospects would depend crucially on the type of settlement that was negotiated after a vote for exit but it is hard to imagine any large medium term upsides.
The main problem with Brexit is that, if it were to occur, no one would have the slightest idea about how our revised relationship with the EU would be arranged. The uncertainty would be intense, and the short-term effects significantly adverse. I have little doubt that if the UK were to leave the EU, we could cope relatively well on our own in the longer term, but it would cast a considerable pall over the immediate subsequent two years, or so. If we look longer at a ten year horizon, it is not clear to me whether the longer-term effect would be good or bad.
The referendum itself will lift uncertainty and bear down on asset prices and growth.
Brexit means more than exiting EU — it also means several years of domestic political uncertainty, the prospect of a further Scottish referendum and uncertain international trade and investment relations. Even if the long-term outcome is only marginally worse than under continued membership, the loss of output and the negative impact on asset prices could stretch for years.
Brexit would probably trigger weakness in sterling and bring forward interest rate increases. Growth will be weaker as the UK will be seen as a less attractive place to locate a business. Investment and productivity growth would be weaker as a result.
Howard Archer, Chief European & UK Economist, IHS Global Insight
It would cause us to lower our GDP growth forecast for 2016 and highly likely for 2017 as well. Even if you believe the UK would actually be better off outside the EU in the long-run, there will be substantial uncertainty for some time in the aftermath of the decision to leave and this will likely hit both domestic and foreign investment in the UK. It could also undermine investor confidence in UK assets, at least for a while. For example, it will take time to establish the parameters of the UK’s relationship with the EU on trade and access to single market, and it will also take time to establish any trade agreements with other regions.
There is also likely to be more of a dampening impact on UK economic activity through heightened uncertainty, in the run-up to the referendum if the opinion polls start regularly showing the Brexit side ahead.(not that the opinion polls have a particularly good record recently in the UK!)
It is impossible to really say at this stage how we would change our views for the medium-term outlook for the UK economy at this stage. There are just too many uncertainties.
Much depends on the extent of the trade agreements that the UK reaches after Brexit — not only with the EU but also with other regions/countries. Other important factors include how much the UK is affected by non-trade barriers when exporting to the EU, the amount of deregulation that is undertaken in the UK, what immigration policy is followed, how the City of London’s role as a dominant financial centre and foreign direct investment into the UK are affected. There are also questions as to whether UK economic dynamism could be seriously undermined — or alternatively unlocked — which is not easy to capture in any economic cost-benefit analysis of Brexit.
There is little doubt that the greater and more comprehensive the trade agreements that the UK comes to after Brexit — both with the EU and with other regions/countries — the better (or less badly) the UK is likely to fare after Brexit. But even here there are uncertainties. One concern, for example, is that by engaging in more trade agreements with countries/regions outside the EU, UK companies could be increasingly exposed to competition in their domestic market from very low-cost companies. If this did happen, a key question would be how UK companies responded to this increased competition and if it helped UK economic dynamism by encouraging innovation. If UK companies failed to respond, there would be the risk that it could lead to some manufacturing sectors suffering a serious hollowing out. This would threaten to outweigh any wider benefits to the UK economy coming from cheaper imported goods
Melanie Baker, Jacob Nell, Morgan Stanley
A vote to leave could see the UK flirting with recession by late 2016. Political and economic uncertainty, reflected in market volatility (especially for FX and equities), would be followed by a sharp slowdown in domestic growth, with investment particularly affected. Medium term, we think that a UK exit would imply slower potential growth — lower migration inflows and lower productivity growth as a result of lower capital inflows.
Kate Barker, former MPC member
It would not change my views for next year. And I'm not sure how much it would affect long-term prospects — though medium-term ones would be worse as the economy would enter an adjustment period due to the impact on different sectors. Much would depend on the trade negotiations as an 'out' and on the reaction of the City — the latter seems likely to be a key negative.
Nicholas Barr, Professor of Public Economics, LSE
(b) much worse
Ray Barrell, Professor, Brunel University and VA Research
The increase in uncertainty engendered by the possibility of UK exit from the UK has been one of the main factors holding back investment and growth in the UK in the last few years. If the probability of exit rises then investment plans are likely to be scaled back further, and growth will weaken in 2016. Conversely a positive outcome, with the UK staying in the EU, would provide an immediate boost to growth as uncertainty would be reduced and the medium term negative impacts of exit would be absent.
b) The positive impacts of EU membership on growth are well documented, and in addition output is probably three per cent higher than it would otherwise have been given the Single Market Programme and associated policies that have strengthened competition in the UK. Many businesses in the UK might prefer a less competitive, more profit friendly, environment, and that is why they may favour exit, albeit at a cost to others. One of the major channels of the positive influence of the EU on the UK has been Foreign Direct Investment. The impacts of exit on FDI are statistically difficult to ascertain, but it is clear that US and Japanese firms have seen the UK as a production base for the whole of Europe, and the potential for barriers to trade will reduce their desire to produce in the UK. Exit from the UK will potentially reduce UK output by two to three per cent in the medium term as compared to where it would otherwise have been, and hence potential growth is likely to fall by a quarter of a per cent for a decade, reversing the gains we have made in the last twenty years. Membership has been unambiguously beneficial, with the negative effects of an expensive agricultural protection regime having largely disappeared with reform and the decline in its share of output. It is also unlikely that the EU will be willing to extend all the benefits of membership to a country that has chosen to exit an ever closer union. Hence exit will have costs, but remains a political as well as economic decision.
Richard Barwell, Senior Economist, BNP Paribas
It’s hard to reach a definitive conclusion about what an out vote really means in the medium term until we know the details of our post-exit settlement with Europe — in particular, the terms on which our companies will gain access to European markets — and for that matter, the ramifications of that deal for the political settlement within the United Kingdom. I struggle to see how that uncertainty could be rapidly resolved so in the short run, the safe bet is that the significant and sustained spike in uncertainty will weigh on growth. To the extent that macroeconomists understand investment at all, we think that this kind of shock to uncertainty will raise the hurdle rate on major investment projects leading companies to delay spending. No doubt the public will have been repeatedly told in the run-up to the vote that millions of jobs depend on our continued membership of the European Union so there would likely be some impact on consumer confidence and consumer spending too.
Charles Bean, Professor of Economics, London School of Economics
Brexit — actual or expected — may encourage some businesses to postpone (or even cancel) planned investment. Were the UK to decide to leave, renegotiation of the terms of our relationship with the EU would probably take several years to achieve and may well prove contentious with other member states. The continuing uncertainty surrounding the terms of access of UK firms to the EU market mean that this dampening effect on investment could be expected to last for several years.
Andrew Benito, Goldman Sachs, Senior European Economist
The UK's in/out referendum on continued membership of the EU will donate the year ahead. Our view that the UK will vote to retain its EU membership is based on the public deciding to prioritise its economic interests and avoid a lengthy period of elevated uncertainty that would follow an exit. We believe a vote to leave the EU would weaken the outlook for activity significantly.
In the event of an EU exit, foreign investors — currently happy to finance a sizeable current account deficit and roll over large gross external liabilities of the UK on the grounds that the finances an economy growing at trend — would likely reassess those views. Credit conditions would tighten as bank funding costs rise and spending plans would be disrupted.
The growth impact in the longer-term would depend on how exit affected trend productivity growth and expansion of the labour force. Were it to happen, a vote to leave the EU would presumably be motivated partly by wishing to reduce levels of immigration, suggesting these medium-term effects would also be negative.
Nick Bosanquet, Professor, Imperial
Would not impact 2016-17 — but some medium terms effects on business confidence. Knock on effects for political stability would be more important than Euro trade effects.
Ryan Bourne, Head of public policy, Institute of Economic Affairs
a) Voting to leave would obviously create a degree of uncertainty in the immediate two years after we presumably have triggered Article 50, particularly if it became unclear whether a free-trade agreement would not be negotiated in this time period. But much of this risk is surely already priced in given the heavily fluctuating polling on this issue. I guess it really depends on how the debate shapes up and subsequently what ‘out’ would mean and how this affected investment decisions. There’s no reason per se that voting to leave would change prospects, particularly if we transition to out by remaining in the single market to begin, but if it became clear that voting to leave was perceived as a mandate merely to clamp down on migration, that could be more problematic.
b) Looking at countries inside and outside, it’s clear that EU membership is neither a necessary or sufficient condition for good economic growth — domestic policy is far more important. The EU question is largely a political question about where sovereignty should reside. But there seems little benefit for the UK of some of the harmonisation outlined for the near future in the Five Presidents’ report — so I fully expect that provided domestic policy remains sensible and economically liberal and a mutually beneficial free trade is agreed, the medium-term prospects associated with being outside would improve relative to remaining in.
Francis Breedon, Professor, QMUL
Little in the short or long run. Hard to find evidence that EU membership has a significant growth effect (though balance of evidence suggests that exit would have a small negative impact)
Annika Breidthardt, European Commission
We do not speculate on hypothetical questions.
George Buckley, Chief UK Economist, Deutsche Bank
a) Next year: Irrespective of the outcome, the uncertainty surrounding the referendum may begin to impact business investment in advance of the vote. After all, the UK is the biggest recipient of inward investment anywhere outside of the US. It would not be surprising to hear that some overseas firms end up postponing — or worse, diverting to other countries — inward direct investment in advance of the referendum.
b) In the medium-term there are sizeable economic risks associated with exit. Much would depend on what sort of deal the UK could broker with the EU. On the one hand, the EU has a vested interested to maintain good trade links and offer a preferential deal. On the other, they might be keen to avoid exit-contagion by being less generous in post-EU-exit trade negotiations. We would expect investment to suffer the most from an exit (particularly in the event of ratings downgrades), with the impact on growth being only partly offset by a fall in the currency.
Alan Budd, former MPC member
Unless the referendum is held early in the year, uncertainty relating to the referendum will be more important than the vote itself. Uncertainty relates both to the result of the vote and to the consequences of a vote to leave. Both sources of uncertainty are likely to harm investment spending in the short and medium term.
Willem Buiter, Citigroup, Global Chief Economist
Should Brexit occur, the economic impact of a divorce from the EU would be dramatic. The rest of the EU would drive a very hard bargain with the UK (‘pour decourager les autres’); the City would lose most euro-related business. FDI into the UK would collapse. Deep recession and a financial crisis are inevitable. In addition, Brexit would be followed promptly by the break-up of the UK: Scotland, Wales and Northern Ireland leave the UK and join the EU; I would hope that Greater London — the region inside the M25 — would leave England and join the EU. Even if England stays intact.
Jagjit Chadha, Professor of Economics, University of Kent
Given that there is a commitment to have a referendum, it is a good idea to have it earlier rather than later because a looming referendum feeds uncertainty. A vote to leave the EU may not impact much on growth in 2016, as many plans have already been formulated but would clearly involve a considerable reorientation of the economy, which is likely to be costly in the short run. The medium and long term prospects depend on access to the free trade blocs that make up the structure of world trade and the impact on financial and other services, which are not clear to me.
Alan Clarke, Economist, Scotiabank
Just by announcing the date of the referendum is likely to have an impact on the data. The general election campaign saw employment growth stall as firms were fearful of a messy coalition or non-business friendly government (that soon reversed after the election result). I would envisage a re-run of this (potentially more severe) once the date of the EU referendum is known — with hiring intentions and investment intentions particularly hit in the months ahead of the vote. I would also expect the GBP exchange rate to weaken somewhat as the vote approaches, which may help inflation to firm a little. If the UK were to vote to leave the EU, I would envisage investors would adopt a ‘risk-off’ stance — with gilt yields rising and the GBP exchange rate weakening. Weaker investment would be the most likely dampener on growth in the first instance, though consumption could also suffer if hiring stalls or consumer confidence suffers. Uncertainty is the enemy for sentiment — this kind of event doesn’t happen very often.
Over the medium term, the prospects for the UK could depend on the response of our trading partners within the Eurozone. The UK imports far more goods from the Eurozone than it exports in the other direction. Hence the EU has a lot to lose if traditional trading links become severed. As a result, there is good reason for the EU to maintain trade links with the UK outside of the EU. The majority of UK services exports go outside of the EU, which suggests that this sector is less vulnerable to a fractious divorce. So while going it alone is a leap of faith into the unknown, there are some reasons to believe that it need not be the disaster that some of the scare stories may lead us to believe.
David Cobham, Professor of economics, Heriot-Watt University
It won’t make much difference to real income (though it will affect financial markets) in 2016, but it will have strong and lasting negative effects over the medium and long term.
Aengus Collins, Country Forecast Director, The Economist Intelligence Unit
It’s probably worth noting at the outset that our view at The EIU is that the electorate will vote narrowly to stay in the EU, with the pull of the status quo ultimately overcoming the push of rising public disaffection, not just with Brussels but with UK migration policy too. Turning to the question’s hypothetical “no” vote, the EIU isn’t expecting the Brexit referendum to be held before late 2016, so a vote to leave would not have a material impact on our projections for next year.
The medium-term impact would be much more significant. It would be more political than economic: party-political stability and government effectiveness would suffer in the wake of so direct a public rejection of mainstream political consensus. That political backdrop is an important, but often overlooked, part of any assessment of the economic impact of a "no" vote. The uncertainty unleashed by a vote for Brexit would hit consumer confidence and spending in the relatively short term, while a drop-off in business investment would exacerbate existing concerns about the economy’s medium-term prospects.
Diane Coyle, Professor of economics, University of Manchester
A Brexit vote would not do much in the short term but the medium term damage would be serious. Many foreign investors would relocate, export contracts would not get renegotiated because of the uncertainty, and the transition costs of unpicking a 40+ year relationship would be extremely high.
Bronwyn Curtis, Chief economic adviser, Official Monetary & Financial Institutions Forum
What we do know is that the uncertainty will hit consumer and institutional confidence, which means a drop in consumer spending and investment. There are so many unknowns it is hard to gauge the extent of the fallout. Would it hurt the City of London as a financial centre, would the rest of Europe (unofficially) boycott the UK, would sterling be more volatile?
What about the EU itself? The UK is the third-biggest economy and it could trigger a crisis in Europe, which wouldn’t be good for the UK either.
In the medium term, I am more optimistic. The UK is a small, open, globalised economy and the growing areas of the world are outside Europe.
Howard Davies, RBB, Chairman
I doubt if a Brexit referendum can be mounted in time to affect the economy next year. But a ‘leave’ vote would probably dampen investment and growth in the medium term, at least until the terms of a new deal with the EU became clear.
Gavyn Davies, Chairman, Fulcrum Asset Management
The referendum will not make any major difference to 2016 views. However, a no vote would lead to a sharp drop in growth in 2017, due to political uncertainty, worries about Scotland’s status inside the UK, an upheaval in the financial services industry, and a major drop in inward capital flows into the UK.
Panicos Demetriades, Professor of Financial Economics, Ex-Governor of Central Bank of Cyprus and member of the Governing Council of the ECB, University of Leicester
There is no doubt that Brexit is a factor that will weigh heavily on the prospects of the U.K. economy and beyond. Besides the obvious barriers to trade and impediments to capital flows it is likely to create, it may unleash political and economic uncertainty relating to the future of the European project that could have deleterious economic consequences in the whole of Europe. Although the vote itself is unlikely to have much of an impact in 2016, it will almost certainly affect the medium term prospects of the U.K. economy.
Wouter Den Haan, professor of economics, London School of Economics
I would be more pessimistic about the UKs prospects at any horizon if it would leave the EU, unless the EU is hit by a major calamity such as a complete collapse because of the refugee crisis.
Michael Devereux, Professor, Oxford university
Brexit could only have a negative effect on the UK economy — for example, the UK would be less attractive as a business location. But I have no idea about the magnitude of the effect.
I’d say the downside could happen quickly — and even as it is debated since it increases uncertainty.
Peter Dixon, Economist, Commerzbank
(a) Not very much. There might be something of an uncertainty shock but since the rules point to business as usual until the formal exit negotiations have concluded, I would not envisage changing my 2016 forecasts by much;
(b) We are in more uncertain territory here. The empirical literature suggests a hit to GDP of anywhere between 0% and 3% over the medium-term. If we broadly split the difference, and call it 2% over 10 years, this would knock almost 0.25 percentage points off annual growth in the decade following Brexit. If the transition period is shorter (longer) the annual growth cost is higher (lower). But this is more than just about measuring growth. Relationships with a spurned EU would inevitably change; if we turn our back on our economic and political allies, we are operating in a world of much greater uncertainty and I would be much less optimistic about our economic future.
Charles Dumas, Director, Lombard Street Research
Not very much on either account. The key thing in Europe is whether a country is in the euro or not — and Britain, fortunately, is not.
Colin Ellis, Birmingham University, Visiting Fellow
In the event of a vote for exit, I think prospects for next year would be a little weaker, and indeed over the medium term (obviously the latter accumulates more for investment/capital deepening/potential supply). However, I see this as more of a levels shock — albeit spread out a lot — than permanently hitting potential growth. I really don’t see strong benefits from exit; by most objective measures, we already have very liberalised product and labour markets, and I don’t buy some of the numbers that pass for orthodoxy from the likes of the OECD on benefits from structural reforms. But we clearly could survive outside; it wouldn’t be the end of the world.
Ultimately, questions like EU membership — or Scottish independence — should always be about much more than the economics. But inaccurate and highly uncertain numbers get bandied around so much, they may end up (further) damaging the profession, insofar as we have any credibility left.
Martin Ellison, Professor of Economics, University of Oxford
The referendum itself will introduce a lot of uncertainty, with likely negative effects on interest rates and sterling through elevated risk premia. Should the vote go in favour of Brexit, the level of uncertainty is likely to shoot through the roof — the future of the UK outside of the EU is surrounded by Knightian uncertainties, the “unknown unknowns” made famous by Donald Rumsfeld. Is it possible for a country to leave the EU is an orderly fashion? How will financial markets react? The UK will obviously survive outside of the EU — life will go on — but it is difficult to see what form it will take and to believe that the process of exiting will not harm short and medium term prospects.
Andrew Goodwin, Lead UK Economist, Oxford Economics
a) I think the effect would be noticeable though it wouldn’t be a game changer. Inevitably there will be a period of heightened uncertainty which will be bad news for investment
b) This really depends upon what a post-Brexit UK is destined to look like — the absence thus far of any clear vision for a post-Brexit UK is, in my opinion, one of the biggest failings of the groups campaigning to leave. If the UK is to be a ‘Norway’, ie it remains in the EEA, then the chances are that not a lot will change. But at the other end of the spectrum, if the UK fails to agree a free-trade agreement with the EU then the impact on UK medium-term growth prospects would be more serious.
Jonathan Haskel, Professor of Economics, Imperial College Business School
Leaving the EU would likely cause investment to fall due to raised uncertainty and a fall off in FDI investment. But (measured) investment is very low anyway, having recovered only somewhat from the 2008 recession, so I’d expect a fall in GDP and growth, but not as dramatic as it would be if we were in a substantial investment-led boom.
John Hawksworth, Chief economist, PwC
The referendum itself is a source of uncertainty for business, but probably relatively marginal in terms of macroeconomic prospects for 2016. If the UK were to vote to leave the EU, whether in 2016 or later, this would lead to a prolonged period of uncertainty as to the exact terms of exit and the impact on different industry sectors, but it is very difficult to quantify these effects with any precision.
Neville Hill, Credit Suisse,
In the medium-term we’d see the UK’s departure from the EU as being negative for demand — a material hit to exports of services and well as goods — and supply — the UK has benefited from immigration of a labour supply that has largely complemented the domestic working population. So materially negative for GDP and the UK’s standard of living.
The risk is that worsening in living standards is delivered in advance by a sharp correction downwards in the value of sterling. A vote to leave the EU could well be the catalytic event that turns the UK’s current account deficit from “something to worry about” to “a problem”. Given the clear economic risks above, markets would likely demand a considerably higher risk premium the huge capital inflows required to finance that deficit. That’d mean a sharp fall in sterling and the price of UK assets. The UK would then be faced with a noxious cocktail of depressed business confidence; tightening financial conditions; higher inflation (thanks to sterling’s drop) falling real wages and monetary policy tightening to offset that higher inflation. In short, a cocktail sufficient to derail the recent solid performance of the UK economy and, possibly, push it into recession.
Brian Hilliard, Société Générale, Chief UK economist
It would lead me to lower my forecasts because the heightened uncertainty would hurt business and possibly consumer confidence, once the potential consequences had sunk in. Lower growth and thus a lower interest rate profile than in our base case of gentle increases from Q4 16.
Lee Hopley, Chief Economist, EEF, the manufacturers’ organisation
There are a lot of ifs. If we have a referendum in the summer or Autumn of 2016, and if the polls are close, then it is pretty likely we’d see confidence among businesses to invest, in particular, take a pause in the run up to the vote. Around 40% of EEF’s manufacturing members have told us that they see potential uncertainty around the UK’s place in the EU as a business risk in 2016. But this is unlikely to be enough to put a material dent in growth in 2016 — regardless of the outcome.
Longer term, the potential is for more negative consequences if Britain’s votes to leave the EU, especially given the complexity of the divorce proceedings. We’d be looking at least two years of difficult negotiations, during which we’d expect a hiatus on investment activity.
Steve Hughes, Head of Economic and Social Policy, Policy Exchange
a.) Not much. The referendum is unlikely to be held until September at the earliest, so there will only be three months for it to make an impact. Any impact will depend on public confidence in the exit plans laid out in the campaign and its immediate aftermath by those that wish to leave.
b.) That all depends on what a post-Brexit relationship with the EU looks like, and how long it is expected to take to reach whatever that new relationship is. We are nowhere near knowing what the answers to either of these questions are — although the campaign will inevitably tease at least some of this out.
Ethan Ilzetzki, Lecturer in Economics, London School of Economics
The political classes seem to be taking a “remain” result for granted, despite polls running very close. A “leave” result would likely take a majority of observers by surprise. There is a substantial risk, therefore, that this result would rattle markets and create economic and policy uncertainty. The longer term implications would be negative, but it is very difficult to ascertain their magnitude. The devil will, as always, be in the details. Will the UK have a free-trade agreement with the EU after departure? Will the UK continue to accept EU migrants — who make a net positive contribution to this country — after leaving?
Richard Jeffrey, Chief Investment Officer, Cazenove Capital Management
In the short term, a vote to leave the EU would result in prolonged period of uncertainty, lasting around two years. Inevitably, there would be an impact on trade flows with the EU, although any damage to exports of goods and financial services would be partially offset by lower imports of consumer and capital goods. However, inwards investment would decline and it is also likely that domestic industry would put investment plans on hold for a period. This could have a more significant impact on growth during the transition period. I do not anticipate that there would be a significant impact on household or government spending. Once the exit terms had been negotiated (and I assume it would be in the interests of both parties to agree a ‘clean’ exit), the UK could become a more attractive base for foreign companies looking for an European base. One specific area of the economy that could benefit would be financial services. Therefore, the medium term implications of Brexit could be modestly positive.
Oliver Jones, Economist, Fathom Consulting
A vote to leave the EU in 2016 could have a significant impact in terms of confidence and would lead us to revise down our forecasts. The biggest effect would be uncertainty — both in the run up to the referendum, and afterwards in the event of a vote to leave. It would take several years to be sure about the structure of Britain’s relationship with the EU after a vote to leave: would we participate in an arrangement like Norway or Switzerland, or would some other arrangement be put in place. While those uncertainties remained unresolved, investment would be likely to be the hardest-hit area, undermining growth in both the short and the long term.
Dhaval Joshi, Chief strategist, BCA Research
Brexit would not directly change the prospects for 2016 because the referendum is likely to be at the back end of the year. Nevertheless, uncertainty about the vote outcome could weigh on the economy, as some long-term spending commitments were put on hold.
Brexit would be a negative shock to the economy in the medium term because foreigners would reassess the UK’s merits as a destination for foreign direct investment. Also, while multinationals would certainly maintain a significant toehold in the UK, their centre of gravity would inevitably move closer to the core EU.
DeAnne Julius, former MPC member, now Chair of UCL
I would expect a month or two of financial market volatility to follow a Leave vote, and anxiety by certain business segments but not a significant hit to growth either in the short or medium term.
Stephen King, HSBC, Senior Economic Adviser
If by ‘next year’ you’re referring to 2016, the answer is ‘not much’ — partly because the vote isn't likely to come through until later in the year.
If by ‘next year’, you’re referring to 2017, the answer is ‘possibly quite a lot’. There would be huge political turmoil in Westminster — particularly with regard to finding a successor for Cameron — a very uncertain divorce negotiation with the European Union, growing pressure from Scotland for another referendum vote, a potentially massive legislative programme to create new UK laws to replace existing European laws and, at the very least, bemusement on behalf of countries outside Europe as to the UK’s economic and political prospects. However, there would also possibly be big questions about the EU’s future: populists in other European countries would doubtless regard the UK’s exit as an opportunity to force through radical political reform.
The evidence is very mixed. It’s worth noting that, of the bigger economies in Europe, the UK has consistently been one of the better performers as measured by GDP per capita since around 1980, only a handful of years after the UK first joined. It may be that, for all the criticism, the UK has actually flourished within the European Union. Footballers that leave clubs where they have done well have sometimes underperformed thereafter: just think of Fernando Torres at Liverpool and then at Chelsea. Could the UK be heading the same way?
Simon Kirby, Head of Macromodelling and Forecasting, NIESR
The 12 to 24 month period after such a vote would probably prove quite volatile for the UK economy. There will probably induce greater uncertainty around various negotiations with trading partners and with the EU in particular. I’m going to avoid the medium to long-run prospects questions as I do not want to pre-empt the answers from research published in the coming months, including by some of my colleagues at NIESR.
James Knightley, Senior Economist, ING
Confidence would take a severe hit given business surveys show the majority of companies are pro-EU membership. It would therefore create significant uncertainty that will hurt business investment and hiring. Sterling would likely fall and the BoE could reverse course on any policy tightening. I would therefore see a significant hit to near-term activity, but assume a trade deal would get agreed fairly quickly and the more stimulative monetary conditions could actually see 2H17-2018 growth do better than would otherwise happen. Longer term implication depend on what the UK can achieve with its new found "freedoms", but it would also ensure another Scottish Independence referendum, that could drag the UK economy back into the mire.
Ashwin Kumar, Director, Liverpool Economics
The prospect of a referendum will increase economic uncertainty, reducing investment and growth below their potential.
Ruth Lea, Arbuthnot Banking Group, Economic Adviser
There would be very little difference for 2016. Trade with the EU & investment activity would continue much as usual even if a 2016 referendum supported Brexit.
Improve prospects: the UK would be able to appeal/amend irksome regulations (eg employment legislation, but not so much product regulations which tend to be agreed internationally), would be able to negotiate its own trade deals, would be able to run a non-discriminatory immigration policy without having to favour EU nationals and would no longer be a major net contributor the EU budget.
All these would help the UK’s medium-term prospects.
Grant Lewis, Head of Research, Daiwa Capital Markets Europe
A vote to leave the EU will inevitably have an impact on the UK’s growth prospects. In the short term the main effect is likely to come through weaker business confidence, and hence weaker investment. So growth in 2016 and into 2017 will be weaker than otherwise would have been the case. The longer-term impact will inevitably depend on the nature of the UK’s eventual relationship with the EU. A settlement that resembles EU membership, albeit without any say in the rules, need not necessarily have too large an impact on long-term growth prospects, although certain sectors, such as finance, will likely suffer. Any settlement that sees UK access to EU markets restricted will clearly have a much greater impact on growth prospects — those who think that the Commonwealth can replace the EU as the UK’s main trading partner are simply deluded about both the economics and the politics. And anything that stops or severely restricts the flow of migrants to the UK from the EU will have an inevitable impact on the country’s potential growth rate.
John Llewellyn, Partner, Llewellyn Consulting
"Prospects for next year would not change much, on the assumption that any vote comes late in the year, although pro-Brexit polls in the run-up could begin to dent investment.
But in 2017 and beyond, investment could fall off significantly. And there could well be retaliation in the UK’s European export markets. This is a risk that the UK does not need.
Gerard Lyons, Chief economic adviser to Boris Johnson, the Mayor of London,
(A) The question assumes the outcome of a Referendum will be a Brexit. I would expect the Referendum debate to highlight the democratic deficit as the key issue, given the political focus of the EU project. But, in terms of economics, if the No campaign wins — as this question assumes — then it will have been able to paint a vision of how the UK will thrive and prosper outside of the EU. If that is the case then the impact of a Brexit on business and consumer confidence may be muted. Nonetheless, even though Brexit should not damage the UK in the medium term it is equivalent to an economic shock and thus would likely have a temporary near-term impact. Also, regarding the impact in 2016, another key issue is when a Referendum may take place. It could even be as early late June 2016, allowing for the four month campaign, and ahead of a likely escalation of the migrant crisis this summer. It should be said that remaining in the EU also contains considerable uncertainty — such as the future relationship between the euro zone and the non euro zone and consequences of ever closer union — yet in 2016 it is the uncertainty associated with a Brexit that will likely attract attention in terms of the economic impact. It is hard to quantify this, but one would expect there to be both uncertainty ahead of, and immediately after, a no vote. The market consensus was wrong ahead of Black Wednesday, when sterling left the ERM, expecting it to push rates higher and trigger a recession, it of course had the opposite impact. Leaving the EU is different to leaving the ERM, not least because of the need to negotiate an exit and future relationship, but the consensus may also be too pessimistic about the impact of Brexit, and the Referendum campaign should allow a clear positive future vision of Brexit to be outlined.
(B) The medium term outlook for the UK with Brexit is positive. One way to picture the economic impact of a Brexit may be the shape of a letter ‘V’ or a ‘tick’. That is, Brexit may be like an economic shock, leading to near-term uncertainty over the future relationship with the EU and as the UK has to establish a framework for trade deals. The reality is that the key issue is not only whether one is in or out of the EU but what one does inside, or outside. In the medium-term, Brexit would be better for the economy than remaining in an unreformed EU. The best scenario would be a truly reformed EU, but instead of the present debate being an opportunity for the EU to focus on how it reforms — boosting demand, reducing unemployment, having an affordable social welfare system, being outward looking and innovative — it has been characterised more as British problem. That suggests significant reform is unlikely. So the choice may be a stark one, between the UK being in an EU that is inward looking, insular as the EU’s share of the world economy shrinks or outside, trading with the whole world including Europe, negotiating our own, better suited, trade deals with a focus on what the UK is good at. Trade deals that should be quicker to negotiate, bespoke, clearly understood, iterative and enforceable. Europe’s economic model is backward looking, with high rates of unemployment, and is unfit to position Europe well in a changing global economy. That is why it must reform. The UK needs to pursue a global agenda — and the issue is whether it is able to do that in a reformed EU or whether it needs to pursue that approach outside.
George Magnus, Senior economic adviser, UBS
A mid year referendum that resulted in a Brexit decision would most probably have a significant impact on sterling fairly quickly, which would worsen the Bop position up front, and growth. Capex and employment growth expectations would be scaled back. We would end 2016 on a worse footing than we started, with negative consequences cumulating into 2017 and the medium-term. A cheaper pound though might help at the margin.
Chris Martin, Professor of Economics, University of Bath
a) not much; Brexit is not a short-term issue
b) very much; Brexit would be an economic disaster.
Michael McMahon, Associate Professor of Economics, University of Warwick
a) On the announcement of a vote resulting in Brexit, I expect there would be some financial volatility and potentially some corporates would scale back or even cease their investment plans as they wait to determine whether (and to what extent) the UK will remain a base for their operations or whether they would be better off operating within the EU borders.
b) I think there is a medium term reduction in UK prospects through the likely reduction in the UK’s attractiveness as a base for operations in the European Union (discussed above). Additionally, I think that inward (and outward) migration currently has a positive effect on UK medium term growth prospects and Brexit would also reduce this. Perhaps I would say that as a EU migrant!
Costas Milas, Professor, University of Liverpool
A Brexit outcome will make me more pessimistic for our growth prospects in (the second half of) 2016 and the medium term. Those arguing for a British exit from the EU have failed to present an economically convincing argument of the Brexit advantages. So if the British electorate vote in favour of Brexit, we will witness huge investor uncertainty and as a result, a (much) higher rate of return investors demand to be compensated for the greater risk they are willing to take in order to hold UK debt. This higher yield will add to the cost of borrowing that companies face and will delay their investment decisions. Consequently, economic growth will take a big hit in the second half of the year and beyond.
Patrick Minford, Professor of applied economics, Cardiff Business School, Cardiff University
Not at all in the short term. Not much will happen as the negotiations run on for two years. I have always said it will be Breset not Brexit; ie the UK needs to get a new serious relationship with the rest of EU that allows proper UK self-government, especially in vital trade and regulative areas, and yet preserves the many useful areas of co-operation. I have little doubt also that the many vested interests that gain from EU protection will be awarded fairly long transitional arrangements under the negotiations.
In the medium and long term Breset will herald a major growth-boosting period as the UK breaks free of the over-mighty EU with its protectionist mindset and establishes free trade and intelligent regulation aimed at UK economic interests.
Allan Monks, JPM Research, Economist
A vote to leave would create significant political and economic uncertainty, with the UK’s large current account deficit magnifying the potential impact of a drop in investor confidence. This could be damaging for near term growth and employment prospects, and would give the MPC another reason to delay policy tightening. . If Scottish voters to remain within the EU, this would create stronger grounds for the SNP to call for another referendum on independence — although the sharp drop in the price of oil has certainly weakened the economic argument for independence. One of the biggest challenges in the negotiations will be brokering a free-trade agreement for the UK with the rest of the EU. The existing models used by Switzerland and Norway will look unattractive to the UK. The UK’s bargaining position is weakened by the fact it sends a much greater proportion of exports to the EU (45%) than the rest of Europe exports to the UK (10%). Any new free trade arrangement for the UK would come with strings attached. One irony of Brexit is that it would most likely involve the UK signing up to many regulations and standards that were a key reason for the discontent with EU membership in the first place.
Kathrin Muehlbronner, Moody’s, Senior Vice President — Sovereign Risk Group
A vote to leave would be negative for growth in our view, not only for 2016 but also for 2017. Investment in particular would likely be negatively affected, given the uncertainty over what arrangements would replace EU membership. We expect that the UK government would aim to find a new trade arrangement with the EU that replicates at least some of the benefits that EU membership affords. But this would take time to negotiate. Exports would also be affected if exit from the EU resulted in the imposition of tariffs and non-tariff barriers.
The medium-term outlook would depend to an important extent on the kind of new trade arrangement with the EU that the UK would achieve as well as other policy choices of the UK government with regards to trade, regulatory and immigration policies. A Swiss-style series of bilateral agreements or a more comprehensive free trade agreement would replicate many of the advantages of EU membership. Neither would be easy or quick to achieve, however, implying a potentially prolonged period of uncertainty, which in itself is damaging to confidence and investment. Exit would also increase domestic political risk and might reduce the predictability and effectiveness of economic policymaking. Another referendum on Scottish independence would become more likely. In addition, the UK government would need to renegotiate a whole series of trade agreements with other countries and regions, besides negotiating with the EU.
Erik Nielsen, Global Chief Economist, UniCredit
Brexit would inject huge uncertainty for the outlook. I assume that Cameron would step down, and one of the Eurosceptic (or anti-EU) Tories would become PM. And I assume that the noise about Scotland would re-emerge, possibly leaving to another referendum on independence — and maybe to a break-up of the UK. From here, the issue is whether the UK (or what’s left of it) would follow Norway in taking everything from Brussels (unlikely), or try to negotiate everything (Switzerland model) — likely, but outcome very tough to assume would always be a positive one.
Charles Nolan, Professor, University of Glasgow
The short term outlook for investment would likely worsen somewhat as would, I fear, the medium term outlook.
David Owen, Chief European Economist, Jefferies
On balance, we expect the UK to vote in favour of remaining in the EU, but the uncertainty created by the vote and what exactly happens in the case of a disorderly exit could have a major effect on the pattern of spending particularly in the one or two quarters surrounding the decision. It could also push back the timing of the first rate rise in the UK well into 2016 and potentially 2017.
In the case of an exit we can expect the rating agencies to downgrade the UK and for investors to focus much more attention on the UK’s large current account deficit. Reserve managers will ultimately probably end up holding fewer Gilts, pushing up long term interest rates and sterling would weaken. One or two quarters of negative GDP are certainly possible, with the BoE adding liquidity on demand and potentially relaxing policy. In an ideal world they would have already got the Bank Rate up to a level where rates could be cut significantly again, but that will not be the case by a mid-2016 vote. A further round of QE is certainly possible, but any sharp sell-off in the pound would obviously complicate the policy decision. However, in a macro sense a weaker pound is precisely what would probably be required to generate stronger growth and capital inflows again.
Economically and politically the UK would certainly be viewed as significantly weaker, especially if there were further calls to break-up the Union, with the SNP demanding another referendum on Scotland’s future. The fallout for investment and foreign direct and portfolio investment flows would be significant, especially in a protracted period of negotiations with the eventual out-turn far from clear. However, the idea that the UK could break away from the rest of the EU and for there to be no wider consequences for Europe more generally is simply fanciful. On a 3 year view there would still be a cost for countries like Italy and Spain in terms of what they yielded over Germany. In the absence of more wide-ranging structural reforms, Europe is perceived as a low growth bloc anyway. And, without the UK’s much faster trend rate of growth (and not just because of EU migration), the rest of the EU would have far less political clout in the world. Which is one reason why we think a compromise will be achieved.
Joseph Pearlman, Professor of Economics, City University
a) make me more pessimistic as there will be smaller numbers of skilled workers entering the UK job market, and the UK might face increased tariffs on exports to Europe.
b) unclear, since the government could react to short-term growth reductions by providing subsidies for in-house training, and might also generate more growth by providing more funds for government investment.
John Philpott, Director, The Jobs Economist
A Leave vote would not change my view about 2016, since most of the practical dislocation would be delayed for a while. I think exit would result in a modest reduction in medium term trend growth, due to a mix of lower inward investment, which would hit productivity, and the likelihood of tighter controls on immigration from EU member states.
Kallum Pickering, Senior UK Economist, Berenberg Bank
a) If the UK were to vote to leave, this would be the most significant downside risk to the economy in 2016. The risk of an immediate and strong weakening in economic activity would be very high. Consumer and business sentiment would decline sharply leading to a slowdown in consumption and business investment. The cause would be a sharp rise in uncertainty about how a Brexit would be managed — what would be the future of London and how would Britain’s trade relationship with its biggest market the EU develop? These would be two of the most pressing issues.
b) Medium-term prospects for the economy would be markedly weaker and policy support would be required. Our expectation that the Bank of England would be able to execute a gradual hiking cycle beginning in 2016 would be at serious risk.
Christopher Pissarides, Regius Professor of Economics, London School of Economics
It will negatively change my views about next year because of the uncertainty about the mechanics of exit and the new arrangements with the EU. The impact of these uncertainties could be substantial. I would still be less optimistic about the medium term because I don’t think Britain will get as good a deal out of the EU as it now has, or as good as Norway currently has.
Ian Plenderleith, former MPC member
(a) Material damage to confidence, with immediate braking effect on growth.
(b) Material deterioration.
Jonathan Portes, Principal Research Fellow, National Institute of Economic and Social Research
I’d divide this into three:
a) short-term: relatively little visible impact. No doubt there would be some turbulence in financial markets, but I doubt we’d see much impact on the real economy in the very short-term (ie next year).
b) medium-term (ie the period of the negotiation over terms of exit and post-exit relationship between the EU and the UK, lasting at least 2 years). Significantly negative. These negotiations would be protracted, complex and probably acrimonious, leading to considerable uncertainty for both UK companies trading with the EU and international investors (not to mention EU citizens resident in the UK and vice versa). All this would be likely to have a substantial and negative impact on business confidence, business investment, FDI, and possibly trade and migration.
c) longer-term (post the negotiations and any transition) — impossible to forecast with any precision at this point, given we have very little idea of what the outcome of the negotiations in b) would be. The UK could undoubtedly survive and prosper outside the EU, and in some respects (flexibility on some aspects of trade and migration policy and regulation, reduced contributions to the EU budget) might benefit; but there are obvious and serious risks, in particular to trade in services (including financial services) which are vital to the UK economy and will become even more so in the next few decades.
Adam Posen, President, Peterson Institute for International Economics
If the British electorate vote to leave the EU in 2016, it changes my views about 2016 and the medium term drastically for the worse. Business investment will dry up rapidly, and greater uncertainty premia will get built into interest rates. Trade with Euro Area will start declining, and that decline will increase over time. Sterling might start to crash forcing a Bank of England tightening. Real estate market would likely have some air taken out of it. Huge self-inflicted wound.
Vicky Pryce, Chief Economic Adviser, CEBR
Prospects likely to worsen if a referendum is held in 2016 and the result is ‘no’ as the outlook for investment, including from abroad, will worsen while negotiations of the terms of a new relationship with Europe begin. The political fallout from it will inevitably impact negatively on growth for years after. If the referendum is postponed then uncertainty remains for longer and will weigh heavily on the markets through 2016. Only prospect of improvement on forecasts for 2016 would be a clear and overwhelming vote to stay in.
Victoria Redwood, Chief UK Economist, Capital Economics
A vote to leave the EU in 2016 would clearly increase the uncertainty the UK would face, as there could be up to two years of exit negotiations. In that case, the UK’s economic performance would probably be a bit weaker than our current forecast.
However, our views about the medium term prospects would not change much. Just as the potential gains from leaving have probably been overestimated, so have the potential costs. We think that the UK will do well whether in or out of the EU.
Ricardo Reis, Professor of Economics, London School of Economics
It would greatly increase my uncertainty on the prospects, at all horizons. There is little guidance on what exact policies would be adopted after the vote and, while leaving the EU could allow for some policy improvements, it would also open way for a whole list of dreadful policies regarding trade, immigration, and industrial policy that membership in the EU now precludes. Overall, my growth forecasts would probably go down, but much more important, my uncertainty about these forecasts would increase very much.
David Riley, BlueBay Asset Management, Head of Credit Strategy
The uncertainty generated by a pending and closely contested EU exit referendum could discourage consumption and investment spending and result in weaker growth in 2016 than currently forecast. A vote in favour of exit from the EU would render the medium-term outlook highly uncertain and generate volatility in financial markets until businesses and investors have clarity on the terms of the UK’s exit and its ongoing commercial relationship with the EU.
Bridget Rosewell, Senior Adviser, Volterra Partners
I don’t think that Brexit makes any real underlying difference, and indeed the advantages and disadvantages of membership of the EU (as distinct from a common trade area) are finely balanced.
However, uncertainty and political disruption could make a difference and will certainly affect Scotland and Northern Ireland.
Philip Rush, Nomura, Senior European Economist
There is a bifurcation in the growth outlook beyond the referendum. A vote to leave would introduce uncertainty, discouraging investment and potentially challenging the current account’s financing to the point that the currency falls, importing inflation and hitting real incomes and growth. This would lower our growth forecast immediately following an out vote. However, as we expect the referendum in September 2016, most of the pain would be felt in 2017.
After the risk premium driven shock, there will be transitional costs into whatever the UK’s new relationship is and these costs will be front-loaded. The negotiation of the UK’s relationship with the remaining EU could take up to two years, so for most normal forecasting horizons, there will be downside news from a vote for Brexit. However, it is possible that the UK negotiates a better position outside the EU that allows a brisker pace of growth to be achieved beyond that. It may take a long time before the front loaded costs are recovered, if they ever are.
Michael Saunders, Citi
Pre-referendum uncertainty may cap business investment in 2016, but the adverse effect on the economy of a vote for Brexit in 2016 would be mainly felt in later years.
The UK economy at present is one of the major winners from globalisation, combining relatively low levels of regulation in the labour and product markets with (as an EU member) a high degree of open trade access globally. The UK stands out among major advanced economies in being able to achieve high inflows of foreign investment, a very high employment rate with high pay levels. Brexit would put that at risk, and would represent a retreat from globalisation, making the UK a less attractive place for business location. This is the biggest threat to the UK economic outlook and one of the top global uncertainties for 2016.
Andrew Sentance, Former MPC member and senior economic adviser, PwC
It would not change my view of economic prospects for next year very much but would make me more negative about the medium-term, for 2 reasons. (1) Disruption and uncertainty created by Brexit; (2) Lack of a clear alternative to underpin UK’s trade and investment relationships, which have supported UK growth while we have been EU members. It is worth noting that once the UK escaped from the 1970s doldrums, it has achieved the strongest growth of GDP/head of any G7 economy from 1980. This period contrasts with the 1950s and 1960s before the UK joined the EEC/EU when our economy was in serious relative decline.
However, I have more confidence in the British electorate. I predict we will vote to stay in the EU.
Philip Shaw, Chief Economist, Investec
a) On the basis of a mid-2016 ‘leave’ vote, it is difficult to see a sudden and abrupt slowdown in spending and so activity should have enough momentum to carry it through the rest of the year.
b) Medium-term prospects are a different matter entirely. Inward investment would probably dry up, while uncertainty over EU trade access might well slow domestic capital spending and, of course, exports. But there are implications for Britain’s internal dynamics, as well as its relationship with the rest of Europe. A ‘leave’ vote risks prompting Scotland to push for another referendum on independence, which if granted, could put a possible break-up of the UK back on to the agenda.
Andrew Simms, Director, New Weather Economics
Uncertainty and instability are the enemies of real prosperity. Solutions to pressing problems that range from migration to climate change and financial crime require international collective action, which a British exit from the EU would seriously undermine. The uncertainty it would create would be widely destabilising and worsen the prospects for progress in any of these areas. Simultaneously it is likely to complicate economic life in Europe still further and make solving existing problems to do with the European Union harder.
b) change your views about medium term prospects?
In the medium term, I suspect that Brexit would expose as illusory its advocates’ stated aims of greater policy sovereignty, simplicity and freedom from reciprocal obligations and social and environmental responsibility. The sheer complexity of continuing European and global economic interdependence would replace one Europe-wide set of agreements with a thicket of even more. In this circumstance, all sorts of prospects would become trickier and harder still to navigate.
Andrew Smith, Chief Economic Adviser, Industry Forum
(a) Although a vote to leave would increase uncertainty, coming next summer at the earliest I doubt it would have much impact on the economic outcome for the year as a whole.
(b) Further out, though — for several years at least — I would expect the effect to be unambiguously negative. We cannot count on the EU being prepared to grant continued access to the European market on the same privileged terms, particularly if the divorce turns vitriolic (contrary to received wisdom, in terms of trade flows "they" do not need "us" as much as we need them). And, if it were so easy to expand trade with the rest of the world to compensate, you would expect that to be happening already."
Don Smith, deputy chief investment officer, Brown Shipley
Whatever the view on whether the UK would be better or worse-off outside the EU over the longer term, the uncertainty generated by a decision to leave the EU would undoubtedly be damaging for sterling assets across the board and, indeed, the value of sterling on foreign exchanges. Consumer confidence would be lower, business confidence and investment intentions would also very likely be negatively impacted. The fallout would take time to fully materialise although growth would probably be a little weaker during 2016 in this event.
Andrew Smithers, Retired,
I hope we don’t leave the EU but for political rather than economic reasons. Leaving is likely to make little difference either next year or in the medium term, unless if helps by pushing down sterling.
Peter Spencer, Professor of Economics, University of York
a) I doubt that a vote to leave would have much impact on activity in 2016 year, though uncertainty in the run up to the poll and subsequent negotiations over the UK’s access to the single market could be very damaging for investment in the second half.
b) Longer term, everything would hang on how those negotiations went, but I doubt they would go well. It is all very well to say that we import more from Europe than we export — but what does that say about the state of British manufacturing industry? Could we really pretend that we could do without those imports? Would UK consumers really be prepared to drive around in British Leyland cars (assuming that outfit or its like could somehow be resurrected) rather than BMWs? What sort of bargaining point is that?
James Sproule, Chief Economist, IoD
My expectation is for the UK to vote to stay, but narrowly, and for the Brexit question to remain pertinent. If we were to vote to leave, the degree of uncertainty is likely to cause a drying up of investment both in the UK and the wider EU.
Ian Stewart, Chief Economist, Deloitte
Exiting the EU opens up the possibility of profound change in the UK’s legal, regulatory, trading and fiscal arrangements. The period of uncertainty that would follow and exit vote would dampen business sentiment and soften growth prospects in the near term. But with inflation subdued the Bank of England would be well placed to try to counter such effects by running easier monetary policy. Much of the activity that vanished in the wake of Brexit would be displaced rather than destroyed, and growth rates would move back to around trend rates on a 3-5 year view.
Gary Styles, Director, GPS Economics
a. The short run impact would be very small (concealed in the rounding).
b. The medium term outlook is a much tougher ask under this scenario. Higher levels of policy and economic uncertainty will drive economic growth lower. Interest rates are likely to move higher and inward investment lower.
Phil Thornton, Lead consultant, Clarity Economics
The uncertainty over the timing and outcome of a referendum in 2016 has probably been priced in by the markets and by businesses so perhaps no immediate impact. The medium-term outlook depends on any forecaster’s views of the pros and cons of leaving. My opinion is that the decision to leave will create more uncertainty that will continue as negotiations for a post-EU world rumble on, the City of London will suffer, and foreign investors may well think twice about current or future investments this side of the Channel. So negative.
David Tinsley, UK and European economist, UBS
The uncertainty generated by the EU referendum vote in the run up clearly has the capacity to restrain business investment growth next year. Moreover, should the vote result in the UK leaving the EU there will be a protracted period of uncertainty over the UK’s position vis-à-vis the EU for some time to come. That again could put a break on growth, and indeed potentially delay the Bank of England tightening cycle by some way.
The medium term consequences of BREXIT would depend critically on what type of trading relationships with the remaining EU were negotiated. Under the assumption that a relatively liberal trading arrangement was agreed, the medium-term consequences for the UK’s long-run growth rate would probably not be very high, although the economy could still suffer a once-off fall in the level of output.
Samuel Tombs, Pantheon Macroeconomics, Chief UK economist
A Brexit would subdue investment and exports immediately, even if it took time for the terms of the UK’s exit to be negotiated. Borrowing costs would rise and sterling would be vulnerable to falling sharply, boosting inflation, if overseas investors became hesitant about lending to the UK
The potential economic benefits of leaving the EU — greater freedom to negotiate trade agreements and decreased regulation, particularly for the City — will take several years to be felt. A convincing case has not been made yet that these long-run benefits justify the near-term disruption and the loss of unfettered access to the single market.
Kitty Ussher, Managing Director, Tooley Street Research
(a) a vote to leave in 2016 would have a very negative short- to medium-term effect on the investment climate mainly through the uncertainty that it would create as to what precisely will change and when.
(b) In the in the medium to long term, the trend rate of GDP growth will be a little lower due to reduced competitive pressure on UK firms from possible implied or real trade barriers and the negative signal sent to prospective investors seeking to trade with the EU from Britain.
John van Reenen, Director, Centre for Economic Performance
The direct effects on incomes and GDP would be long-term and obviously depend on the exact negotiations of what follows. Under a pessimistic scenario we have estimated losses of real income over the long-run of 6-9% of real incomes.
There are losses of 2% even under a more optimistic situation where we are in EEA like Norway. In addition to a loss of trade there will be a loss of foreign investment and less inward migration from highly talented Europeans who have aided UK growth. The idea that we’ll be able to strike lots of new free trade deals with other countries being free from EU is fantasy, as is the idea that there will be some bonfire of red tape that lights up UK growth. Scotland will be lost and we will have an ongoing degree of uncertainty that will depress us economically, politically and culturally for many years to come.
Daniel Vernazza, Lead UK Economist, UniCredit
In the event of Brexit, the economic uncertainty (it will take up to two years to negotiate the terms of exit) and political uncertainty (Cameron would surely have to stand down) will significantly weigh on economic activity.
In the medium term, it seems likely that the UK’s relationship with the EU will not be that different from the current arrangement — it simply has too much to lose otherwise. Ironically, the UK will likely end up with less say, unilaterally adopting most EU legislation. So, while the medium- to long-term impact of leaving the EU will be negative, it will probably be modestly so.
I believe that the fear of Brexit is already having an adverse impact on economic activity, in that it is leading to a postponement of decisions relating to FDI and corporate investment more generally.
If we did vote to leave, I think that, in the first instance, the size of these effects would be amplified, and consumer confidence would probably also suffer at that point. This would weaken the economy considerably during the fourth quarter of 2016.
The impact on medium-term prospects is more difficult to predict as it does depend on the precise post-exit arrangements with the European Union, as this will determine the degree to which we lose the benefits of belonging to a large, relatively integrated market.
Peter Warburton, Chief Economist, Economic Perspectives
A) Brexit would be more likely to hurt imports than exports. Expect to see a weakening of Sterling in the lead up to the referendum, and probably to remain weaker afterwards.
B) Brexit is likely to have little impact in the medium term on UK growth. There is a chance that it will lead to higher inflation. The money that is currently being used to pay the UKs EU contribution could potentially be diverted into funding a tax cut to improve competitiveness, potentially cutting corporation tax, for example.
Simon Wells, HSBC, Chief UK economist
If Britain votes to leave the EU in 2016, the near-term impact would be hugely increased economic uncertainty. In the near term, there may no clarity about the post-EU arrangements. The economic implications of a ‘soft exit’ (eg remaining in the EEA) could be very different to a ‘hard exit’ (eg being no more part of the EU than the US is). The uncertainty during the period of divorce negotiation could lead to investment decisions being delayed. This mammoth task would also divert government and civil service resources away from other areas of policymaking.
There is no evidence that being a member of the EU has harmed the UK economy and it may well have benefited. Pragmatically, it is hard to see a post-EU deal that would place huge restrictions on UK-EU goods trade, which would be mutually destructive. The uncertainty lies in potential barriers to services trade, which is important to the UK given its expertise and trade surplus in services with the EU. But the longer-term assessment of the impact of EU withdrawal will have to be made over several decades.
Mike Wickens, Professor of Economics, Cardiff University and University of York
a) In the short term Brexit would probably be a negative shock to the economy due to greater uncertainty about the future.
b) In the longer term the economy should benefit from becoming more efficient, competitive and open. The main danger to this is that the EU. to its own detriment, tries to erect tariff barriers to the UK.
Neil Williams, Group Chief Economist, Hermes Investment Management
The big known unknown for 2016! Logic suggests the UK not wanting to distance itself from its main trading partner, risking FDI, and diluting its political relationship with the US.
But, leaving would raise recession risk, take the shine off the pound, and question who’s going to buy the gilts — given around one-third of our £1.3tr conventional gilts is held by international investors who’ll care about currency and credit-ratings. Domestically-led Japan got away without a buyers strike, but if we can’t, would the BoE have to reactivate QE?
Chris Williamson, Chief Economist, Markit
Growth next would be lower due to the uncertainty and disruptions caused by Brexit, especially in relation to trade. It could easily knock 0.5% off growth while also deterring investment and hiring to a significant extent.
Longer term, I’d expect a net negative impact to persist, based on research which shows most major companies perceive EU membership to be beneficial.
Richard Woolhouse, Chief Economist, BBA
a) Clearly it would increase uncertainty as the terms of UK engagement with the EU would need to be “renegotiated”. This is very unlikely to be a costless exercise.
b) UK is a significant recipient of FDI and many invest in the UK for access to the EU market.
In addition, exit would likely be a negative for parts of the City — in particular, the global investment banks.
Many US investment banks organise their EU and Emea operations from London and would need to be confident of retaining the benefits of the passporting regime.
The UK has also gained significantly in terms of its share of Euro denominated activity in the last 15 years and many European banks have located their wholesale banking activities in the UK as a result — this trend would very likely be reversed should a Brexit occur."
Tony Yates, Professor of Economics, University of Birmingham; Centre for Macroeconomics at the LSE
My best guess would be that not much would happen in the short term, but in the longer term the trajectory for potential output would be somewhat weaker. That said, there are big risks, and they are all to the downside. The referendum itself may provoke market panic, and there will be several key event risks after that, all of which could trigger market runs, if for no reason than people think they will. Location decisions feature strategic complementarities strongly. [Whether it’s good for me to be here depends on whether you will be here]. Circumstances like this can mean large and sudden changes in location — read direct investment and other capital flows — that could be highly damaging to a UK that looks like it might exit, or does.
Azad Zangana, Schroders, Senior European Economist & Strategist
It largely depends on when the referendum will be held. I think it will take place in the autumn, which leaves little time for an exit vote to have an impact on the economy in 2016. There could be a slowdown in business investment in the run up to and just after the referendum.
The final impact will be determined by the terms of exit, which could take two years to be negotiated. During this period, business investment, especially that funded by foreign direct investment flows could be adversely impacted.