Brexit tripling chance of UK falling into recession

BLoomberg

Fancy another recession? Economists say voting to leave the European Union would dramatically increase the U.K.’s chances of heading down that road.
As Britons contemplate their place in the 28-nation bloc before June’s referendum, respondents to a Bloomberg survey said the probability of a slump spikes to 40 percent in the event of an “out” vote. That compares with just a 13 percent risk predicted in the most recent monthly poll. With the EU debate covering everything from immigration to loss of sovereignty and access to trade, those campaigning for Britain to stay argue that an exit would jeopardize investment, jobs and growth.
While the economy has more than regained ground lost in the 2008-2009 recession, that took four years and included a period where unemployment jumped to a 16-year high.
“You would have a lot of uncertainty effects which would materially drag on growth,” said Chris Hare, an economist at Investec Plc in London who previously worked at the Bank of England.
“It’s pretty likely that we’ll see volatility in financial markets, possibly a tightening in U.K. credit conditions, a hit to business and household confidence and all those things combined should drag on the economy.”
PM David Cameron will lead Britons to the polls on June 23. He, and others arguing to remain part of the bloc, say an exit would cut trade opportunities and diminish London’s role as an international hub for business and finance.
Those who favor it say the U.K. would be better off free from the EU’s power to regulate businesses and requirements to accept European immigrants.
Tense Debate
How the vote pans out remains to be seen. Recent polls have shown a wide divergence, with YouGov on Feb. 23 giving the “leave” side a 1 percentage-point lead, just a day after a ComRes survey put “remain” 12 points ahead.
So far the Bank of England has tried to skirt the tense political debate. Last October, Carney published a report that addressed the U.K.’s relationship with Europe, but no judgment on the economic impact of an exit.
At their February policy meeting, Carney and fellow officials said the referendum could be a “downside risk to near-term business spending.” They added, however, that there were offsetting factors and they weren’t yet seeing an impact on investment.
The prospect of Britain leaving the world’s largest single market is piling pressure on the pound at a time when traders have already pushed back bets on the timing of a BOE interest-rate increase. Together, these factors helped propel sterling below $1.39 on Wednesday, to the lowest level since 2009. It was at $1.3927 at 9 a.m. London time.
According to the Bloomberg survey, 29 of the 34 economists see the currency sinking to $1.35 or below within a week of a vote to leave — levels last seen in 1985.
Rob Carnell, chief international economist at ING Bank NV in London, said an exit would be a “net negative for the U.K.”
“The biggest channel would be investment, much reduced foreign investment flows, and lower general domestic investment,” he said. “Companies certainly wouldn’t be embarking on an expensive investment program and that uncertainty would transfer quite quickly. We might not go into recession but it certainly increases the probability.”