Equities and sterling could be hit if prime minister David Cameron fails to fast-track the UK’s in-out referendum on Europe, economists have warned.
One expert claimed the UK’s GDP growth could fall below an annual rate of 2 per cent unless the uncertainty surrounding the country’s membership of the European Union (EU) is dealt with quickly.
Last week the new Conservative government was given a nudge by Bank of England governor Mark Carney after he suggested the issue should be dealt with “as soon as possible”.
Speaking to the BBC’s Today programme, the governor said while the data suggested businesses had not yet slowed down their investments in new staff or machinery, when talking to companies he had noted “an awareness of some of this political uncertainty, whether because of the election or because of the referendum”.
Joshua McCallum, head of fixed income economics at UBS Global Asset Management, agreed.
“The uncertainty for the next two years is likely to be a negative for business investment and UK growth,” he said.
Azad Zangana, senior European economist and strategist at Schroders, said: “We are likely to see both foreign and domestic companies really start to hold back in terms of investment in order to wait and see if the UK is part of the EU.”
Mr Zangana warned some international companies “may need to start making contingency plans on whether to move out of the UK and into another European country”.
HSBC recently cited the risk of the UK leaving the EU as one of the reasons for its decision to review whether or not to keep its headquarters in London.
While it is hard to measure the exact impact a lack of business investment would have on the UK economy, Mr Zangana said the uncertainty, combined with planned government spending cuts, could bring UK economic growth down to “2 per cent, or possibly even lower”.
In addition to hampering the rate of growth, Neil Williams, chief economist at Hermes Investment Management, said “the uncertainty will doubtless… hold back UK equities and take the shine off the pound”.
“With the UK’s current account deficit already the G7’s widest, at about 5 per cent of GDP, any trade disruption and slower FDI [foreign direct investment] would surely bode badly for the pound,” he added.
Jupiter fund manager Steve Davies said the referendum was “one of the biggest risks to the macroeconomic outlook for the UK”.
“The uncertainty created by the referendum may have a negative impact on business investment, so that is something we will be keeping a close eye on over the coming months,” he said.
If the UK does leave the EU, both Mr McCallum and Mr Zangana said the financial sector could be hit particularly hard.
Mr McCallum said: “If the UK leaves the EU, large proportions of the financial business in London could be forced into the eurozone and with it all the concurrent tax revenue.”
Mr Zangana said large US investment banks “would not be in the UK if [it were] not for the single market”, adding they would likely move to Ireland instead.
The new Conservative government has pledged to give the public a vote on whether to leave the EU. The referendum is expected to take place in 2017, although it could be brought forward to next year, according to some media reports last week.
