June 13 (Lagos) - Britain leaving the European Union has been so far the biggest global risk event for financial markets, and with less than two weeks to the EU referendum date investors are becoming more concerned withchoppier trading activities expected to carry on until the markets get an answer on June 24.
One month earlier, voting polls indicated that a Brexit was unlikely to happen, but recently these polls are not helping investors to position themselves, as they are providing contradicting results which is making it too difficult to predict the outcome. All we can say at the moment is that it looks like a very close call.
Trade is the most significant risk
From an economic perspective, trade is the most significant risk if the leave vote wins. The campaign in favour of voting for Brexit argues that UK can negotiate new trade agreements with EU members, but neither U.S. President Barack Obama, nor Germany’s Finance Minister Woflgang Schauble agree, and most recent comments from Mr. Schauble clearly seem to block the way for the UK to enjoy the benefits of the single market without being an EU member, such as Switzerland. This suggests that separate trade deals might take couple of years if not a decade to be crafted, putting downside risk on economic growth in the short and medium run.
While Brexit supporters claim that the Bremain camp is over-exaggerating the long term economic consequences of UK leaving the EU, the most likely immediate impact will be:
1. Businesses putting investments on hold, and reducing their workforce or placing a freeze at best.
2. Larger account deficit due to stop or reduction in foreign direct investments inflows.
3. Tightening financial conditions leading to higher interest rates.
4. Sharp fall in sterling leading to higher inflation, less real income and drop in consumer spending.
5. Slight drop in house prices on the prospect of lower future migration.
6. Prospects of downgrades from rating agencies sending Gilts lower.
7. Equities plunging, but varying upon each sector.