Nobody Knows

18/03/2016 at 5:28 pm

During the summer of 2015 this blog dedicated a post to “Brexit”. The discontinuation of the United Kingdom’s European Union membership had become a possibility on the strength of a wafer-thin 12-seat governing majority won in May of that year by the only political party offering a referendum on the subject. Back then, it looked likely that

The economic consequences will equally obviously be argued over with increasing volume as the date for the Breferendum approaches. There is little to be gained by getting into that argument now as the actual consequences would depend on the options available to the UK should the decision to leave the EU be taken.

Lately, however, several analysts have been putting out research pieces making market calls on Brexit. This week the Chancellor himself joined the fray, trying to make it seem during his Budget speech that the Office for Budget Responsibility were all for “remain”. So what has changed? Do we know any more now about the economic or market consequences should Britain vote on 23 June to regain full political self-rule than we did the previous summer?

Mr Osborne said to the House of Commons on Wednesday that such a vote could entail “an extended period of uncertainty” which could depress “business and consumer confidence” and might mean greater volatility in markets. Couched itself in uncertain terms, it was damaging uncertainty which thus formed the substance of the Chancellor’s argument for the UK’s continued adherence to Brussels, and which forms the substance of those of others on his side of the discussion.

Dealing with what ought to be the most obvious point first: markets are quite capable of exhibiting volatility without political assistance. Just look at the past 18 months. First, tumbling oil took 90-day historic volatility on the S&P 500 to its highest level since mid-2012. Then the turmoil over the summer and into the end of last year pushed it up further, into a range not seen since the panic over eurozone sovereign debt and the attendant market crashes of 2011. A Brexit vote might well ginger markets up a bit, but this is nothing new: it has nothing to contribute to the argument one way or another.

The point about business confidence specifically, as opposed to the impact of any future post-Brexit agreements on international trade, needs to be addressed in two different ways.

Firstly, there is now evidence on this subject from business leaders themselves, and they are divided: as the referendum has drawn closer, British executives, entrepreneurs and spokespeople have come out on both sides of the debate. Foreign investors, too, have given conflicting guidance. JP Morgan and Goldman Sachs announced donations to the “remain” side back in January, and other Wall Street firms have considered throwing in their lot, hinting at their preparedness to move to Frankfurt or similar. On the other hand, overseas car firms with UK plants began indicating a strong willingness to look through the vote and stay invested in Britain as far back as the autumn. So far, then, there has been uncertainty, but no more concerted gloom from businesspeople than there was several months back.

Secondly, as with markets, the corporate sector – including financial services – must have an eye to considerations beyond the political. Skill sets, regulations, tax, costs – including relocation costs – and other factors all enter the mix. Again, this is nothing new: whatever the decision in June, Mr Osborne and his successors at the Treasury are arguably more important in this context.

Consumer confidence is driven by earnings, employment, house prices, inflation and interest rates. The more secure we feel in work, the more we have to spend and the more stable the required level of our spending on goods and services, the greater our confidence in the economy and the more aggressive our activity within it. The impact of Brexit on those factors is no clearer today than it was after the general election.

Finally, much of the economic analysis of Brexit has centred on the pound. The consensus seems to be for devaluation to one degree or another (20% from Goldman Sachs earlier in the year). Yet when Scotland looked like it might vote to leave the United Kingdom back in September 2014 the most significant one day fall in the trade weighted sterling index was -0.9%. The splitting up of the currency’s economic area was a real prospect at that time yet it hardly budged. Again, this analysis is purely speculative, and for the same, over-arching reason: it is trying to analyse something which doesn’t exist.

Should the UK “vote leave” this June, then, there may be market turbulence attributable to this. Nobody knows – just as nobody knew back in the summer.

Brexit would be a historically significant political event, not an economic one. And should it occur, then whether it would present more of a threat to or opportunity for the country’s economy would depend on the political response.

Readers may well have their own opinions on how confident, or otherwise, to feel about this.

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