The June 23 referendum on the UK’s future is unlikely to have a significant economic effect on US and global markets, but the effect on Britain itself is likely to be more substantial.
Across the board, most analysts see the pound depreciating against the dollar in the event of Brexit. HSBC analysts expect the pound to fall as much as 15%, while Goldman Sachs analysts see it falling by 11%.
This wouldn’t be a complete negative for Britain. Goldman Sachs found that 80% of the FTSE 100 constituents sales are abroad and exports represent 13% of GDP. A weak local currency is helpful for exporters because the products they sell seem less expensive in other countries. For companies with business abroad, a strong foreign currency turns into a greater number of pounds once the currency is converted. This has somewhat already been expressed in the stock market with the top publicly-traded UK exporters significantly outperforming the FTSE 350 in recent months.
However, a big caveat to this is that half of the UK’s exports go to the EU, and their existing trade agreement with Europe will end if the UK officially leaves. This makes the weakened sterling’s effect on exporters less clear. They also still do import more than they export right now, and these imports will become comparatively more expensive with a weakened currency.
HSBC also notes the risk of investors and lenders decreasing their cash inflow to the UK, further depressing the currency, and increasing the cost of borrowing. Goldman Sachs sees British 10-year-bond yields increasing by 0.15% if the country votes to leave.
The Bank of England is likely to be able to provide liquidity easily, as they have the ability to implement long-term repurchase agreements. The BOE also has the option of raising interest rates to fight the pound’s depreciation, but this poses the risk of further harming growth.
Overall, both HSBC and Goldman see Brexit representing a modest negative for the first couple of years, decreasing GDP by 1-2%, with a lot of the risk coming from uncertainty. The former also believes that inflation may increase up to 4-4.5% a year as well, but notes that the UK treasury believes that GDP will decrease by 3.6% within two years.
It will take up to two years for an exit to officially take place, and some sort of new trade agreement would have to be created in that time. Companies in both Britain and mainland Europe won’t know what the conditions will be, or if anything will be approved. All of this will delay long-term investment plans. How long a final deal ends up taking is also uncertain; Canada and the EU started negotiating a free trade agreement in 2009, that has still not been ratified.
Unfortunately, the longer run impact of a leave vote is harder to quantify at this stage, given that we don’t know what kind of trade agreement the UK and EU would arrive at.