10 March 2016

On 23 June, UK voters will have to answer this question: ‘Should the United Kingdom remain a member of the European Union or leave the European Union?’

The result of the referendum may be a close call and uncertainty about the outcome is already having an impact on the UK economy. On 22 February, sterling tumbled to a seven year low against the dollar, according to data on our Bloomberg terminals, after London Mayor Boris Johnson came out in support of the ‘leave’ option.

The BlackRock view on Brexit

Many of our clients are concerned about the possibility of a Brexit and have been asking for our view on the implications. To that end, The BlackRock Investment Institute has published Brexit: Big Risk, Little Reward | The UK Referendum on Europe, a report that collates our thoughts on the matter.

We believe it is a good idea that the UK stay in the EU. The economic and financial costs of a Brexit are material for the UK, in our final analysis, both in the near and long term. And it is not just the UK economy that would feel the effects of Brexit: the EU would lose a world-class financial centre, a major budget contributor, a defence pillar and a leading voice for free markets.

However, it’s important that, on behalf of our clients, we analyse and assess the impact of a ‘leave’ vote.

Impact of a ‘leave’ vote on the UK

We see a Brexit vote having limited but noticeable impact on the UK economy in the near term – and likely significant implications in the long run.

  • In the near-term, we believe uncertainty (and volatility – markets hate uncertainty) would depress investment and growth in the months after the vote, and put pressure on the UK’s sovereign debt ratings.
  • In the longer term, we find it hard to believe an independent UK would be better off economically, barring a big rise in productivity or a much lower exchange rate, neither of which are guaranteed.

A worst-case scenario would be a vicious cycle of currency weakness, an abrupt stop to capital inflows and a sharp deterioration in market confidence. This could necessitate a rise in interest rates to prevent an overshoot in the exchange rate. The economic impact on GDP, investment and job creation would be severe.

Impact of a ‘leave’ vote on the EU

We see five main impacts on the EU:

  1. Competitiveness: the EU would lose a global financial centre and easy access to world markets.
  2. Defence of the realm: the UK is an important contributor to European security, spending an above-average 2% of GDP on defence.
  3. Cohesion: the UK is not the only country sceptical about an ‘ever-closer union’. Would the EU break up? Probably not, but a few EU members, emboldened by Brexit could leave.
  4. Free market voice: the UK has resisted attempts by EU institutions to increase economic regulations; would the UK’s absence tilt the balance towards less-friendly policy makers?
  5. Budget: the UK is the largest net contributor (£9 billion) to the EU budget after Germany and France.

So which way will UK voters lean? The most recent NatCen Social Research poll of polls points to a slim majority for the remain camp. The experience of referenda worldwide suggests the status quo tends to gain in the final stages of campaigning.

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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 02/03/2016 and may change as subsequent conditions vary.

It is not just the UK economy that would feel the effects of Brexit: the EU would lose a world-class financial centre, a major budget contributor, a defence pillar and a leading voice for free markets.