EU referendum: Business and markets need to start thinking through Brexit risks

 
David Tinsley
Any exit from the EU might contain elements of "soft" and "hard" Brexit (Source: Getty)

The formation of the 'leave' and 'remain' groups to fight their respective corners in the Brexit debate should be a further reminder to both business and markets that the referendum on the United Kingdom's place in the European Union is coming.

We do not yet know the date for the referendum, nor are details of what the UK government is trying to achieve in its remediation entirely clear, but we do know that the outcome of the vote could be very consequential for the British economy over coming years and decades. And in our view at UBS, the time for business and markets to start thinking about this is now.

In our recent published research on the EU referendum we argue that should the UK vote to leave the EU the manner of that departure would be crucial. If the UK achieved a "soft" Brexit from the EU, in which it preserved access to the single market and kept something close to today's freedom of movement of labour, then the costs from Brexit may be contained.

But, on the other hand, if the UK lost market access to the single market and freedom of movement of labour was restricted, we believe the cost to the UK economy could be considerably larger (up to almost 3.0 per cent of gross domestic product) and there could also be long run impacts on the economy's growth rate.

Read more: Failure by the EU "In" campaign will end the United Kingdom

Importantly, the increase in economic uncertainty in the run up to the referendum and potentially after the vote itself has the possibility of dampening UK activity, in part because firms investing in the UK would not have clarity on how their access to export markets will change in the future.

In truth any exit from the EU might contain elements of "soft" and "hard" Brexit. Potential risks could include a reduction in foreign direct investment into the UK, at least for a time. Given the UK's large current account deficit and its need to fund this, we believe such an event could put sterling under pressure.

On top of this, a reduction in the long-run growth rate of the economy would force fixed income markets to reappraise where the Bank of England would need to raise rates to in its next tightening cycle.

Read more: Cameron "hasn't got anywhere" with EU renegotiations

For business and markets we believe it is not premature to start thinking about the possibility of Brexit. For firms this means reviewing their export markets and getting a clear understanding of the risks they face from changes in their access and the regulatory risks that could increase.

For markets we think it is harder to 'take a view' before the date of the referendum is known. Equity investors will need to be on top of which companies' revenue streams are particularly impacted from EU departure. And with the UK exchange rate and the outlook for UK interest rates all potentially affected by the referendum, playing close to attention to the evolving debate and the opinion polls is considered essential.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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