With less than a week to go before Britain’s EU referendum, almost every poll shows Leave ahead by a comfortable margin and big business is getting the jitters.
The referendum campaign has already taken its toll on sterling and on the FTSE 100, which neared a four-month low this week.
The Bank of England warned yesterday that the prospect of Brexit is not only the biggest risk to UK financial markets but perhaps also to global markets.
“On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply. This would be consistent with changes to the fundamentals underpinning the exchange rate, including worsening terms of trade, lower productivity, and higher risk premia,” its monetary policy committee said.
Despite the anxiety about Brexit, the UK's unemployment rate this week fell to its lowest level since 2005 and consumer spending has been solid. There is growing evidence, however, that uncertainty about the referendum is leading to delays to major economic decisions, including property transactions, car purchases and business investment.
Rory Godson, chief executive of financial and communications firm Powerscourt, knows of at least one transaction worth hundreds of millions of pounds which has been made conditional on the outcome of next week's referendum.
“People make conditional offers for businesses all the time. The conditions are usually around regulatory clearance or shareholder approval and now, people are writing explicitly, Brexit being defeated. So people are building conditions into transactions, saying that this deal can happen on the morning after a vote to remain or not at all,” he said.
Until this week, big companies have been lining up to warn of the dire consequences for their business if Britain votes to leave the EU, often writing letters to their employees warning that their jobs could depend on the outcome of the referendum. Now that the polls are pointing towards Brexit, companies such as IAG, which owns British Airways and Aer Lingus, are seeking to reassure investors.
Risk assessment
"We have undertaken a risk assessment and, at this stage, have concluded that should Britain vote to leave the EU this will not have a material impact on our business," chief executive Willie Walsh said.
Former chancellors Nigel Lawson and Norman Lamont and former Conservative leaders Michael Howard and Iain Duncan Smith yesterday accused both the government and the Bank of England of inventing scare stories about the economic impact of Brexit. They claimed the greatest risk to Britain's economy was remaining tethered to the economies of the euro zone.
"There has been startling dishonesty in the economic debate, with a woeful failure on the part of the Bank of England, the treasury and other official sources to present a fair and balanced analysis. They have been peddling phoney forecasts and scare stories to back up the attempts of David Cameron and George Osborne to frighten the electorate into voting Remain," they said.
There is some evidence that voters are swallowing the Leave line about the economy, with an Ipsos MORI poll finding that 31 per cent of people think they will be better off in five years’ time if the UK leaves the EU while only 18 per cent think they will be better off if the UK stays in.
Although big companies and their lobby group, the Confederation of British Industry, are overwhelmingly opposed to Brexit, owners of small and medium-sized enterprises are divided over how to vote. A TNS poll of more than 500 businesses last week found that 37 per cent of SMEs favoured Brexit while 38 per cent wanted to stay in the EU.
Despite the even split on voting intention, 68 per cent believe that Britain will vote to remain in the EU, a fact Amy Cashman, TNS's UK managing director of financial services and technology, said was significant. "While some SME owners are backing Brexit, the high proportion of those predicting that the UK will remain in the EU shows that fear of the unknown is likely to be a deciding factor. The reasons given by SME owners for voting, on both sides of the debate, show that the Brexit debate is influenced by passions and personal preferences," she said.
George Osborne this week unveiled a draft emergency budget he said would be needed if Britain votes to leave the EU next week. The £30 billion package of tax rises and spending cuts included a 2 per cent hike in the basic rate of income tax and a 5 per cent increase in the top rate, as well as cuts in health, education and defence spending.
Such a response to an economic downturn is likely to make a bad situation worse and independent observers predict that the policy response to Brexit will be to prime the pump rather than launch a fresh round of austerity. James Knightley of ING predicts an emergency rate cut on Friday if the Leave campaign wins.
“In the case of Brexit, there is a high probability that inflation rises sharply as a result of currency weakness, but we think that the Bank of England will look through this, as they did in 2011. Instead, we think the focus will be on the growth risks and financial market turbulence, which would dampen domestic inflation pressures over the medium term. Consequently, we would expect a 25 bp [basis points/quarter percentage point] rate cut on June 24th,” he said.
Despite threats by big financial firms to move jobs from the City of London to centres such as Frankfurt, Paris and Dublin, Godson is sceptical about the idea of a Brexit bonanza for London’s rivals.
“The City of London and financial markets generally are having a tough time. The fixed-income department of the investment banks, which produce an awful lot of the wealth, have had a torrid couple of years. So the City is in a middling kind of place to start with. But it is the case that pools of talent and pools of liquidity don’t move very easily,” he said.
“It will be investment decisions postponed, new investment maybe going elsewhere. I don’t think it will see the wholesale transfer of substantial operations from the UK into other countries but rather that future opportunities will be in other countries rather than in the UK.”
Pent-up investment
David Cameron has predicted an “oomph” for Britain’s economy if Remain wins the referendum, as pent-up investment floods into the UK. Godson believes, however, that although a Brexit vote would be disastrous, a narrow vote to remain in the EU would leave Britain divided, its government destabilised and its economic outlook uncertain.
“The reality is that no matter what way the vote goes, in or out, we’re facing a prolonged period of instability in the UK and I think that’s what business is thinking at this stage. Business likes stability and likes to know that when they’re committing their investors’ capital. . . what the likely outcome is. And the reality is that there’s great uncertainty,” he said.
