A British 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 percent off the nation’s GDP, Credit Suisse analysts wrote.
Wading into the debate over the upcoming referendum, they predict Britain would probably vote to stay in the bloc.
However, were the public to opt for “Brexit,” the consequences would be “drastic and long lasting,” the analysts wrote.
“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 [pound] sterling,” Credit Suisse fixed income research analysts Sonali Punhani and Neville Hill wrote.
“In its most extreme that could mean a level drop in GDP of 1 percent to 2 percent 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 wrote.
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 Britain’s changed status as a financial hub, Punhani and Hill wrote 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, the note said, which was 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 wrote.
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, traders said.
Credit Suisse echoed others in financial markets in predicting the referendum would be held in June.
British Prime Minister David Cameron has promised a vote by the end of next year, but speculation is mounting that June 23 is his preferred date for the referendum.
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.
Fears of a British exit from the EU are adding to the list of concerns causing turbulence on global financial markets, IMF managing director Christine Lagarde said in Davos.
She called for a swift deal that would ensure that Britain 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 Britain leaving the EU.
However, experts said that much would depend on what trade deals Britain could establish outside the EU.
The Credit Suisse analysts predict an immediate blow to Britain from a Brexit vote, but concede that in the longer term the impact would depend on what kind of relationship the country can 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 wrote.
The impact on jobs also depends on the decisions individual firms take over their operations in Britain, experts said.
Unilever, the consumer goods group behind Persil and Magnum ice creams, has said it would not scale back its British operations if the country votes to leave the EU.
Unilever chief executive officer Paul Polman told the Guardian in an interview that Britain should remain in the EU, but that Unilever’s British sites would not be affected by a vote to leave.
His comments echo those of Toyota chief executive officer Akio Toyoda, who said the Japanese automaker would continue to produce cars in the county of Derbyshire even if Britain left the EU.
However, JP Morgan — the biggest bank in the US, which employs 19,000 people in Britain — hinted it could quit Britain if it pulls out of the EU.
“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,” JP Morgan chief executive officer Jamie Dimon said last week.
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 hedge fund manager Crispin Odey and Phones4u founder John Caudwell are backing Brexit.
Britain Stronger in Europe chairman Stuart Rose on Monday highlighted an analysis that claimed to show EU membership was worth an average of ￡70,000 (US$99,814) in extra trade for each business that exports or imports goods within the bloc.
However, those campaigning for Britain to leave the EU are flagging a study published by the think tank Civitas that claims the single market has had “no discernible benefit” for British exports.
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