A UK vote to leave the EU would trigger a snap recession, prompt a fall in share prices and house prices and knock as much as 2% off GDP, according to analysts at the investment bank Credit Suisse.
Wading into the debate over the upcoming referendum, they predict the UK will probably vote to stay in the bloc. But were the public to opt for Brexit, the consequences would be “drastic and long lasting”, say the analysts.
“If the UK votes to leave the EU, it is likely to entail an immediate and simultaneous economic and financial shock for the UK. We can expect a drop in business investment, hiring and confidence. A sudden stop of capital flowing into the UK could make the large current account deficit difficult to sustain and lead to a sharp fall in sterling,” write Sonali Punhani and Neville Hill, fixed-income research analysts at the bank.
“In its most extreme that could mean a level drop in GDP of 1% to 2% in the short term due to the toxic blend of depressed business confidence, tightening financial conditions, higher inflation and falling real incomes. In the medium term, we expect it to be negative for UK demand and supply, implying a weaker GDP growth path.”
They also predict a Brexit effect on the housing market. In the immediate aftermath of a vote to leave, house prices would fall slightly on the back of weaker incomes. In the medium term, there would be a drop in housing demand because of lower immigration and the UK’s changed status as a financial hub, Punhani and Hill say in the 43-page research note, entitled Brexit: Breaking Up is Never Easy, or Cheap.
On financial markets, investors would likely demand a considerably higher risk premium to hold UK assets, predicts the note, co-written with equity analysts at Credit Suisse.
“We think that would mean a sharp fall in sterling and the price of UK assets, including equities, real estate and gilts. The fall in currency would raise inflation and consequently squeeze real household incomes, depressing consumer spending,” they write.
Traders say the prospect of an EU referendum as soon as June and the uncertain outcome are already weighing on the pound, which has fallen sharply against other big currencies in recent weeks.
Credit Suisse echoed others in financial markets in predicting the referendum would be held in June.
David Cameron has promised a vote by the end of 2017, but speculation is mounting that No 10 has pencilled in Thursday 23 June as a favourite contender for the referendum date. Speaking at the World Economic Forum in Davos last week, the prime minister said he still hoped to conclude his EU renegotiation at a summit next month, but claimed he was “not in a hurry”and would wait if the right deal was not available then.
The International Monetary Fund managing director, Christine Lagarde, warned in Davos that fears of a British exit from the EU were adding to the list of concerns causing turbulence on global financial markets. She called for a swift deal that would ensure the UK could remain in the EU, for the good of the European and world economies.
There have been several attempts to put numbers on potential job losses or the possible blow to economic output from the UK leaving the EU. But experts caution that much would depend on what trade deals could be established by the UK outside the EU.
The Credit Suisse analysts predict an immediate blow to the UK from a Brexit vote, but concede that the impact in the longer term would depend on what kind of relationship the country could negotiate with the bloc. “The exact magnitude of the impact is difficult to estimate as it will depend on the status of the UK outside the European Union,” they write.
The impact on jobs also depends on the decisions individual firms take over their operations in the UK, experts caution.
Unilever, the consumer goods group behind Persil and Magnum ice creams, has said it will not scale back its UK operations if Britain votes to leave the EU. Paul Polman, the chief executive of the Anglo-Dutch business, told the Guardian in an interview that Britain should remain in the EU but that Unilever’s UK sites would not be affected by a vote to leave.
His comments echo those of Akio Toyoda, his counterpart at Toyota, who said the Japanese carmaker would continue to produce cars in Derbyshire even if Britain left the EU.
JP Morgan, however, the biggest bank in the US which employs 19,000 people in the UK, hinted it could quit Britain if it pulled out of the EU. The chief executive, Jamie Dimon, said last week: “Britain’s been a great home for financial companies and [EU membership] has benefited London quite a bit. We’d like to stay there, but if we can’t, we can’t.”
Businesses have been positioning themselves ahead of the referendum. US investment banks and the veteran retailer Sir Stuart Rose are among those backing the campaign to stay in the EU, while famed hedge fund manager Crispin Odey and the Phones4u founder, John Caudwell, are backing Brexit.
Former Marks & Spencer boss Rose, chairman of the Britain Stronger in Europecampaign, was on Monday highlighting an analysis that claimed to show EU membership was worth an average of £670,000 in extra trade for each business that exports or imports goods within the bloc.
But those campaigning for Britain to leave the EU are flagging a study published by the thinktank Civitas that claims the single market has had “no discernible benefit” for UK exports.