In his first monthly round-up of foreign exchange (FX) market news, World First’s Chief Economist Jeremy Cook explains why a lukewarm referendum result would be disastrous for SMEs in the UK.
Fifty-five. And sixty. These are the only two numbers that matter today.
Fifty-five is the minimum majority needed for a decisive outcome in the referendum on Britain’s EU membership. Sixty is the percentage turnout required for that majority to be bullet-proof.
If there is a 55% majority to remain in the EU on a 60% turnout we can expect a sharp rebound for the British economy, GBP interest rates, and for the small and medium-sized businesses that we work with as a UK and global currency broker.
The benefit of Yes to British business
Since the beginning of the year, the uncertainty caused by the referendum has put pressure on UK construction, manufacturing and the service economy. The jobs market has stagnated. A strong Yes vote is likely to encourage firms to increase their capital expenditure, to expand, to hire.
I think growth and inflation could pick up so much that Mark Carney might raise interest rates sometime in the autumn, especially if the Fed raises rates in the summer, as many think it might.
The Eurozone stands to benefit from a Yes vote, too. Sterling is likely to strengthen by around 2-3% if there is a firm Yes. That means a weaker euro, which is what the Eurozone needs to help to build up an export base, grow, drive up spending and inflate away debt.
That’s the good news. The bad news is that any result other than a strong Yes is likely to be very, very bad for the economy and the business environment. The immediate future would be dogged by seemingly endless confusion and uncertainty.
Weakness: a worst-case scenario for the UK
A weak Yes, say, 51/49, could spark political and economic turmoil, with calls for a recount and a second referendum, pressure on David Cameron to resign, the very real possibility of a resurgent Tory right making common cause with UKIP, criticism of the major institutions, notably the Bank of England and the Treasury, and even potentially a run on the pound.
All this turmoil would make the uncertainty caused by the referendum so far look benign – to put it mildly. We could see 3% knocked off GDP by 2020.
Economically, the worst result to wake up to on June 24 would be a 55% vote to leave the EU on a 60% turnout. That could cause great harm to UK corporates.
Every currency trader in London and around the world would probably be called into their offices and told to hammer the pound. Some commentators think that sterling could fall as much as 15-20% almost overnight. That’s like going two-nil down in a football match in the first two minutes and having your goalkeeper sent off.
The uncertainty over what would happen could last for months – or more. No-one knows when Article 50 would be invoked to allow Britain to leave, nor what kind of new relationship Britain would seek to forge with the EU.
Cameron would almost certainly have to resign. But that’s not the end of it. Could Corbyn survive, too? Would the SNP seek another referendum to try to secure independence to enable Scotland to re-join the EU? Nicola Sturgeon seems to think so. Would nationalism rise on the continent too, with politicians calling for referenda on EU membership in their countries, too? Would the continued existence of the EU itself be under threat?
The SME squeeze
All that uncertainty could force companies that have already seen their margins squeezed to as low as 1-2%, to go to the wall.
The sort of companies we work with and have done so since we started 12 years ago. Companies that have grown with us. That would be incredibly sad.
“Hope for the best and plan for the worst” can be a meaningless cliché but the way things are, and the way things could go, it’s the best advice for businesses that want to protect themselves.