Referendum Angst Seen Casting Doubt on U.K. Economic Recovery

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David Cameron
U.K. Prime Minister David Cameron. Photographer: Simon Dawson/Bloomberg

The looming referendum on whether Britain should end more than four decades of European Union membership will hit investment, casting doubt over the durability of the economic recovery.

That’s the view of economists in a Bloomberg survey carried out since the Conservative Party won a surprise parliamentary majority in the May 7 general election. Prime Minister David Cameron has pledged to seek a better deal for Britain and hold an in-or-out vote by the end of 2017.

The findings underscore the risks facing the economy as the shift away from consumer-driven growth promised by Cameron in 2010 continues to prove elusive. The Bank of England slashed its projection for business investment last week and Treasury forecasters say trade will act as a drag on growth for years, as it did for much of the Tories’ previous term in office.

“The closer we get to the date and the tighter the polls, the more uncertainty you will have,” said Fabrice Montagne, an economist at Barclays Plc in London. “Investment could be lower and foreign investors could retrench harder.”

All but two of 26 economists in the Bloomberg survey said the referendum will weigh on investment. The poll was carried out between May 13 and May 20.

‘Seriously Damaging’

Britain sends almost half its exports of goods and services to the EU -- 227 billion pounds ($352 billion) last year -- and foreign companies operating in the U.K. gain tariff-free access to a market of 500 million people in 28 countries.

Leaving the EU “could be seriously damaging for business confidence,” said Philip Shaw, an economist at Investec Securities in London. “Whenever I go out and speak to corporates, one of the key issues is what are the chances.”

Surveys of voters suggest the referendum could go either way, with the balance in favor of staying in the EU ranging from just one percentage point in a Populus poll in April to 12 points in a YouGov Plc survey this month.

The threat of Britain exiting the trading union it joined in 1973 has prompted Deutsche Bank AG to state publicly it might consider moving some of its London-based operations to Germany in the event of a “Brexit.” Bank of England Governor Mark Carney has indicated he favors an early vote to end the uncertainty for business and the Confederation of British Industry says companies must speak out in favor of staying in.

Under Pressure

With the pressure growing, ministers are stressing the need to reach a new settlement with the EU as fast as possible in areas such as migration, raising the possibility a referendum could be held in 2016.

Cameron will meet with European leaders including German Chancellor Angela Merkel and French President Francois Hollande at a summit in Riga on Friday. In a statement before the meeting, he said renegotiation talks “will not be easy. They will not be quick.”

“There will be different views and disagreements along the way,” he said.

Consumers buoyed by record-low interest rates and cheaper fuel and food helped the economy to a ninth quarter of expansion between January and March. With inflation dipping below zero last month, economists say the BOE will refrain from raising borrowing costs until February 2016 and Sonia futures contracts are only fully pricing in an increase by July.

Investment Weakness

The dominant role of household spending contrasts with the outlook for exports and business investment, which contracted at the end of last year. The BOE says investment will grow just 2.5 percent this year instead of the 6.25 percent it envisaged in February. Net trade, which last contributed to growth in 2011, will act as a drag on the economy until at least 2020, according to the Office for Budget Responsibility.

Britain is at a “critical moment for growth” and businesses must “turn up the volume” about the benefits of EU membership, CBI President Mike Rake said on Wednesday. Willie Walsh, the chief executive officer of British Airways parent IAG SA, has warned of growing concern among companies about the referendum.

Elsewhere in the survey, economists gave Chancellor of the Exchequer George Osborne a vote of confidence as he embarks on 30 billion pounds ($47 billion) of spending reductions to erase the budget deficit.

While the cuts are deeper than anything seen over the past five years, 60 percent of 25 economists polled expect that the new Conservative-only government will manage to deliver them.

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