On 23 June, voters in the United Kingdom will consider a referendum on whether or not the nation stays a member of the European Union. Opinion polls currently report that decided voters are about evenly split between remaining and leaving, and the undecided share is still in the low double-digits. Our baseline is predicated on the assumption that the “remain” campaign wins, but we assign only a six-in-ten probability to that outcome.
Our inclination is to trim our 2016 forecast of real GDP growth from 2% to 1% in the event of exit. This mostly owes to the drag of increased uncertainty on consumption and investment. The UK avoids recession, we think, because domestic demand, especially from households, provides a floor for growth. The British pound is the asset most exposed to a vote to leave the EU, but the response is not clear. The Bank of England will no doubt closely monitor the situation, but there is no reason to expect a knee-jerk reaction. On balance, the Bank is likely to leave the door open to an easier stance of monetary policy through dovish communication.
Aside from some general market strains and potentially large changes in bilateral exchange rates, the direct global economic consequences of a Brexit are likely to be limited. The UK’s share in world GDP stood under 4% last year, and its bilateral trading relationships are mostly regionally diversified and limited in scope. Finance bulks especially large in its economy, and adjustments within banking organizations to the changed trading regime would be still another drag on an already troubled industry.
Vincent Reinhart – Standish, a BNY Mellon company