In the short run, the biggest impact prior to the referendum vote is that it would increase uncertainty within the business environment. That would definitely affect sentiment and delay companies from taking investment decision. We expect GDP growth to slow to +2.1 percent in 2016 (-0.1pps below our initial forecast) and +1.9 percent in 2017. Uncertainty will remain high even after the referendum is voted on; particularly if British voters opt out of the EU.
How much impact do you think the referendum will have on the UK economy in the run up to the vote, and, more importantly, if the UK votes to leave the EU?
The exit would be governed by the Lisbon Treaty of which the UK is a signatory. Negotiations could last for up to two years. If the UK leaves the EU without negotiating a Free Trade Agreement (FTA), UK export losses could reach GBP30bn. This would mostly impact trade with Germany, the Netherlands, France, Ireland and Belgium. Even should trade with the Commonwealth pick up, it could take up to ten years to fill the gap. Foreign investment could decrease by up to GBP210bn in the first three years following a ‘no’ vote. The financial sector would take the hardest hit.
The list is long: falling domestic activity, significantly reduced opportunities for the service sector, loss in competitiveness for UK products, higher import costs, disrupted supply chains with expected increase in input prices, loss in profitability for companies, tightening financing conditions, losses in terms of foreign investment, deteriorating company payment behavior and increasing business insolvencies. Ironically, the change in UK international trade relationships could accelerate reindustrialization and the creation of an independent manufacturing UK supply chain. How long would this take? A decade at least – so is this a positive in the long run?
A Brexit would impact other countries as well. In the short term, the negative impact as well as the medium-term opportunities are expected to be concentrated in Ireland, the Netherlands and Germany. Outside the EU, trade with the United States, China, Turkey and India would be the most impacted.
First, since the industry depends on equipment imported from Germany, France, Spain and Italy, I would face higher import prices due to the introduction of tariffs and a GBP depreciation that would ultimately lower profitability. Second, given EU tariffs on imports coming from the UK, I would have to be concerned about a loss in terms of the competitiveness of my products. The negative impact would be even higher if I were positioned in medium-term automotive exports, which are more sensitive to price hikes. Third, as a consequence, I might be forced to lower my selling prices to maintain the market share, but at a cost of profitability.
Finally, given the cost of relocation, it would be difficult to move to another country in the EU. Therefore, I might decide to lower production in the UK and increase it in other EU countries such as Slovakia, Spain, France or even Turkey. This would have a negative effect on employment in the UK.
The Brexit would mean an increase in operation costs and potentially drastic limitations on accessing cheap EUR financing from the European Central Bank. Banks would still be able to finance in EUR on the interbank markets or through currency swaps, but the cost would be much higher than the current Euribor. This increase is expected to be passed on to the private sector.
Therefore, being located in the UK will be less advantageous. Given the likely reduction in the size of the UK market, the volume of operations is expected to fall. Past non-EU investments in the financial sector, notably by the United States and Asia, have been motivated by common regulations between the UK and the EU. This would change with a Brexit. We expect existing financial players in the UK market will relocate to other EU financial centers with Frankfurt, Paris and Dublin the probable winners.