Tuesday 16 / April / 2024
London: Britain's economy would be worse off if voters decide the country should leave the European Union, according to an overwhelming majority of economists polled by Reuters who also gave it a 40 per cent chance of happening.
All but one of 28 economists in the poll taken this week said the Britain would take a hit if the vote — which could take place by June — meant exiting the EU. The sole dissenter said the economy would be unmoved, not better off.
Arguments about the economy are central to the debate. Supporters of Britain leaving the EU say companies would be less bound by red tape, the country would be able to strike its own free trade deals and its existing EU partners would not want to hurt bilateral trade.
But analysts at some of the world's biggest banks said an exit could shrink Britain's economy by as much as two per cent over the next couple of years and could take as much as 10 percentage points off GDP over the next decade.
Most of the mainly UK-based market and academic economists polled expected trade to worsen with Britain struggling to negotiate a favourable trade deal with its former EU partners after renouncing membership of the world's largest trading bloc.
Against this backdrop, a slim majority of economists see Britain's hefty current account deficit widening, underscoring a risk highlighted by the Bank of England.
Britain has been among the fastest-growing rich economies in recent years. But economists worry that an exit from the EU could hurt its prospects if exporters face higher barriers, a weaker pound makes imports more expensive and uncertainty over the shape of a post-EU Britain curbs investment.
"A Brexit outcome will make me more pessimistic for our growth prospects in the second half of 2016 and the medium term," Costas Milas, professor of finance at the University of Liverpool, said.
He said it would trigger "huge" investor uncertainty and make it more expensive for the government to sell British debt.
"This higher yield will add to the cost of borrowing that companies face and will delay their investment decisions."
As well as the risk of Britain losing its unfettered access to its biggest trading partner, its companies might find it harder to tap into the pool of potential employees in the rest of the EU to fill their vacancies. Britain could also end up outside an area that accounts for just under a third of the value of all cross-border investment.
Even though some analysts said an exit could prompt a fall in sterling and make British exports more attractive abroad, 23 out of 28 economists expected it to hurt British trade, while 15 said Britain's current account deficit could widen.
At 3.7 per cent of GDP, the deficit is already large by international standards. BoE Governor Mark Carney highlighted the risk in January when he said that "relying on the kindness of strangers" in the current "febrile" global economic environment was not optimal.
"Brexit could generate a UK balance of payments crisis," Daniel Vernazza, lead UK economist at UniCredit, said. "It's an illusion to think that the UK can retain access to the single market and have more flexibility."
UniCredit estimates that the value in trade would fall by one-eighth if Britain left the EU and joined the European Free Trade Association, costing Britain six per cent of GDP over the next decade or so.
Higher interest rates?
Uncertainty could also prompt the Bank of England to wait until the outcome of the referendum to move on interest rates.
Out of the 28 economists polled, 21 expected the BoE to hold off raising interest rates until after the vote, just as more costly imports put upward pressure on inflation.
Inflation has hovered near zero for months and wage growth is slowing, which together with a weak global economy, has made the BoE reluctant to deliver its first hike in nearly a decade.
But a sharp depreciation in sterling post-Brexit and rise in import prices could see the BoE rushing to move rates higher.
Tony Yates, professor of economics at the University of Birmingham, said he sees a risk of an "an emerging-economy-style 'sudden stop'" where capital flows out of Britain, particularly out of the financial sector.
"In that event, monetary policy would face a hard choice between tightening interest rates to defend sterling, and ward off the inflation that a large depreciation would imply, and not wishing to provoke another recession," he said.
Public opinion polls on the EU referendum question give a confused picture. Polls done by telephone suggest the "in" camp is ahead by a double-digit margin, while online polls show a tight race that the "out" camp could win.
