- Survey of economists shows intense focus on EU referendum
- Weaker global growth is also a concern, while Fed is nowhere
The two biggest risks facing the U.K. economy next year are Brexit and Brexit, according to economists. And the U.S., with its rate increases and presidential campaign? Doesn’t even register.
Forty-three percent of economists surveyed by Bloomberg News said a British departure from the European Union is the biggest threat, while 13 percent chose the buildup to the referendum on membership of the bloc. Thirty-nine percent of respondents picked these as their second-biggest risks.
The EU vote could come as soon as mid-2016 and by the end of 2017 at the latest -- Prime Minister David Cameron has yet to fix a date. An exit would have repercussions for the pound and gilts, and would also trigger negotiations on all manner of economic and other agreements, leaving foreign companies to question the wisdom of investing in the U.K.
“The risk for 2016 is purely around the sentiment for investors,” said Azad Zangana, an economist at Schroders Investment Management in London, which has $436 billion under management. “Foreign-direct investment may be held back until there’s more clarity around the U.K.’s relationship to the EU.”
Economists picked weak global growth as the third-biggest risk. The Organization for Economic Cooperation and Development cut its world economic forecasts last month, as a slowdown in emerging markets spilled over into developed nations such as Germany and Japan.
The Brexit debate has raged since Cameron pledged almost three years ago to hold a stay-or-go referendum. The move was designed to stop members of his Conservative party from defecting to the U.K. Independence Party, which pushes for separation from the bloc.
Sterling volatility jumped to the highest since May last week after Cameron said there was “momentum” for a deal on new terms for Britain’s membership. Once that’s agreed, which could happen at a Feb. 18-19 summit with EU leaders, the prime minister can start the legislative process to hold a referendum, leading to a vote within four months.
“We don’t know what the new deal that Cameron is going to get will look like,” said Dan Hanson, a Bloomberg Intelligence analyst and former economic adviser to the Treasury. “An even bigger unknown is that if we were to vote to leave, we don’t know anything about how we will renegotiate trade deals with different countries.”
Voter opinion polls have been inconclusive. Two telephone polls last week showed leads of 21 and 17 percentage points for staying in the European Union, while two online surveys showed the stay camp running neck-and-neck with the leave campaigners.
Shifts in these surveys as the vote draws closer may roil markets, as they did before the referendum on Scottish independence last year. The pound had its worst day of 2014 on Sept. 8 after a poll unexpectedly showed voters favoring a breakup of the U.K.
Economists expressed less concern that risks will stem from the U.K. housing market, terrorism, asset bubbles and the current-account deficit. The range of lesser issues only serves to underscore the importance of the EU referendum.
Curiously, some of the biggest points of focus through 2015 got no votes at all: lack of liquidity, the impact of Federal Reserve policy tightening and the U.S. presidential elections.
“The Brexit issue will come center stage in 2016 and the whole buildup and eventual vote have the potential to unnerve investors and impact negatively on the U.K. economy,” said Alan McQuaid at Merrion Capital. Leaving aside that, and risks from terrorism, “you could pick a number of issues.”