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BREXIT: Uncharted Territory

Speculation over Britain’s future within the European Union (EU) gained fresh momentum following the announcement of a referendum that will take place on Thursday 23 June 2016. The UK-wide referendum – the country’s twelfth since 1973 – will ask voters whether Britain should remain in the EU or opt for a ‘Brexit’.

The EU’s single market is intended to facilitate free movement of people, goods, services and capital throughout all member states. Although the EU remains the most important single export market for the UK, its importance has declined over the last decade as exports to other areas of the world have risen. According to think-tank Open Europe, about 60% of the UK’s trade is conducted through its EU membership.

At this stage, the economic effect of a Brexit is difficult to calculate because the impact would hinge on any trade pacts the UK manages to agree – not only with the EU, but also the rest of the world. The Confederation of British Industry calculates that membership of the single market gives the UK’s businesses tariff-free access to Europe’s 500 million consumers.

More than one-third of UK-exported goods to the EU are concentrated in industries on which the EU imposes high tariffs. Including automotive, chemicals, clothing, food, beverages and tobacco, these could be at risk in a Brexit deal that does not include relevant trade agreements. Meanwhile, financial services and business services account for more than half of all the UK’s services exports, according to EY ITEM Club. Some two-fifths of the UK’s financial services are exported to the EU, and a Brexit might undermine the City of London’s status as the world’s leading financial centre.

A Brexit could well also affect the UK’s labour market and its productivity levels. Anti-Brexit campaigners fear that leading companies would relocate jobs from the UK to cheaper EU countries. On the other hand, those campaigning for a Brexit believe British jobs – particularly those concentrated among medium-sized and smaller companies – would benefit from a release from EU regulation.

2016 is shaping up to be a challenging year for investors. Sentiment has already been undermined by high levels of instability in financial markets, caused by concerns over China, falling commodity prices, interest rate policy and wider geopolitical anxieties. The build-up to the Brexit referendum is likely to provide fresh fuel for continued share and bond market volatility.

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