InvestmentsNov 24 2015

UK exit could slow down economy

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UK exit could slow down economy

There is a 35 per cent chance of Britain voting to leave the EU, although the vote is still expected to be close, according to a Morgan Stanley report.

The report cites two reasons for the result. First, there will not be a majority vote for such a risky step given the UK’s strong economic performance. Second, prime minister David Cameron is likely to succeed in negotiating some reforms and will campaign to stay in.

However, the report also predicts a 35 per cent chance of an exit and said British growth would plunge to 1 per cent while stocks may underperform by as much as 20 per cent should voters opt to leave the EU. Sterling would see a further 5 per cent decline initially, with weaknesses against other currencies persisting.

“I have seen the report and I think our debt would potentially be downgraded,” Alastair McCaig, market analyst at IG said. “Global sovereign debt these days –and the ratings for it – is not what it used to be. And that would probably affect sterling and diminish its strength remarkably.”

The report further states that there would be a material reduction in potential growth from lower inflows of capital and labour if Britain were to leave the EU. Analysts say the cost of a UK exit are more certain, while the benefits are more speculative.

“The attractiveness from a global perspective is that we are very much a stepping stone into the eurozone,” Mr McCaig said, and that while the UK is not fully in, it is also not fully out of the EU. “We are a central major financial trading hub – a sizeable percentage of the globe’s FX currency trade is done through London.”