If You Leave Me Now: A Brexit Report

The EU Referendum has come around quickly, meaning it’s soon time to make that all-important decision. Rathbones has published a report to help with knowing what is fact and what is fiction, busting the top 5 myths of a Brexit vote before the big day.

On 23rd June 2016, the government will hold a referendum on the continuation of the UK’s membership of the European Union (EU). In the Referendum Bill currently progressing through Parliament, voters will be asked the big question: should the United Kingdom remain a member of the European Union?

Most people are likely to believe that leaving the EU represents the greatest risk. However, with the vast sea of unanswered questions, theories and suppositions of dubious integrity, it’s not surprising to see that more than 15% of voters are undecided on whether to vote in or out. At this point in time – as I am writing this article – the poll stands at 51% ‘remain’ vs. 49% ‘leave’ according to a What UK Thinks opinion poll by NatCen Social Research. The people of the UK are clearly divided on this decision, meaning that whether we vote Brexit or not may well be down to how many turn up on the day.

A new report by Rathbone Investment Management was recently released, which considers the implications of the EU referendum, and aims to dispel five of the most common myths around a potential Brexit. Here is a roundup of the top five myths from Rathbones and how to interpret the real information that’s out there as best we can.

Immigration has held down wages and pushed up unemployment for UK nationals.

Foreign-born persons now constitute 16.6% of the UK’s working-age population – a figure that’s close to the average immigration share for developed economies, but one that has doubled over the past 20 years. But, looking at county data, there is no correlation between immigration flows between 2004 and 2012 and UK-born unemployment.

Although a study in 2014 did conclude that immigration has put downward pressure on the wages of workers in the bottom 15% of jobs when ranked by pay, it also concludes that immigration has increased the wages of those in the remaining 85% of jobs. Therefore, we do not expect wage growth to increase or unemployment to fall substantially if the UK votes in favour of Brexit.

UK trade would collapse after leaving the EU.

Firstly, the government may be able to withdraw but negotiate special terms of access to the common market — ‘soft Brexit’. Even under a ‘hard Brexit’, the UK would remain protected from any vengeful treatment by global trade rules. The trade relationship between the UK and the EU would revert to ‘most favourable nation’ (MFN) terms as negotiated by the World Trade Organisation (WTO), to which both economies belong. Under the WTO’s rules, the EU would not be allowed to enact legislation that discriminates against the UK specifically, although some sectors would suffer generally more than others, particularly autos, food and clothing.

The Swiss financial services industry has thrived outside the EU, which is a model for the UK.

Evolving legislation could push financial services activity towards the Continent if the UK votes for Brexit. This would have profound effects on the economy and exchange rate: the UK’s trade surplus in services is almost entirely in financial and other professional and technical services. This is not a risk that would be realised overnight.

Indeed around 40% of Swiss legislation derives from EU rules — more than twice that of the UK’s. Interestingly, the Swiss have never negotiated a broad-based deal on financial services, and Switzerland does not have full access to the EU’s financial services market. Its financial services continued to prosper due to a rich history (similar to the City of London), a unique taxation system (which is under threat) and its strong ties to London itself.

The UK’s public finances would improve substantially if it leaves the EU.

A simple calculation suggests the country would be £9 billion better off in the current tax year if it did not have to make contributions to the EU. Yet at least two-thirds of this saving would probably be eroded by associated losses and compensatory domestic public expenditure.

Perhaps the greatest risk to UK finances is that Brexit would create uncertainty, which could, by itself, reduce growth. Work by the Bank of England suggests that a one standard deviation increase in its quantification of economic uncertainty, if maintained for three years, could lower the level of GDP by around 0.9%.

Foreign investors will withdraw from the UK if it leaves the EU.

Foreign Direct Investment is very important to the UK and occupies a rather prominent place in the campaign rhetoric. Many in the anti-Brexit campaign believe that investment into the UK would collapse if the UK leaves the EU. Its most likely outcome is a bit more finely balanced.

Surveys indicate that R&D will be the focus of investment projects over the coming years, and here the UK has unparalleled attractiveness. Although it is difficult to forecast the long-term implications of Brexit, we do not expect a divestment of foreign investment in the short to medium term, but suggest that investor uncertainty could adjourn future inflows.

Edward Smith, Asset Allocation Strategist and author of the paper, ‘If you leave me now’, says: “The referendum result could push the UK in several different directions, which makes it difficult to forecast the long-term effects on the economy. In an increasingly globalised world, the UK economy should do well if the country can successfully negotiate new treaties of economic integration with higher growth nations. In the short term, the referendum is unlikely to have a substantial directional impact on financial markets. Yet we expect markets to react to any lack of clarity and associated uncertainty. Sterling is likely to suffer the most volatility, and there are indications that currency traders are positioning for some extreme moves.”

Looking towards foreign investors is one thing, but what about investors here in the UK? Would this be impacted?

Greg Mahon, Regional Director at Rathbones Chichester commented: “Interest rates have been at a historic low of 0.5% for 86 months and as a result, over the past seven years, there has been an ongoing trend of our clients seeking better returns. With cash languishing in low interest savings accounts, more and more investors have been turning to the stock market in a bid to make their money work harder.

“However, with the country’s vote on EU membership on the horizon, there has been a marked decline in investors in the South East taking any action. Across multiple wealth profiles there is a reluctance to make decisions, with many clients opting to wait until after the 23rd June and beyond, when the consequences of referendum and its impact on potential investment strategy, will become much clearer.”

This is a clear insight into just how detrimental uncertainty can be. The report by Rathbones concisely lays out the facts, so that we all can make a decision. We’ve been told time and time again of how important this decision is; how it will affect future generations and change the course of history. However, it’s obvious that not knowing what the future holds is the most damaging part. Would this continue should we vote to leave the EU, or would we be able to get on with drawing up our own legislation, continuing our business in the process?