I am a macroeconomist and commodity market analyst within a very large retailer here in the UK. In essence, my team functions as something akin to an investment bank in many ways, the purpose being to use more sophisticated risk management strategies to minimise price volatility (both commodities and FX) to keep costs low and stable for the customer, so I probably have more in common with the likes of people at JP Morgan and Goldman Sachs than I do with most of the rest of the company.
So with that being said, I have a lot of experience from a buy-side retail perspective, as well as pretty close relationships with a lot of partner banks and financial services companies, which often includes coming across their own internal reports in addition to the ones we generate.
Just a few points to pick up:
"We expect real GDP in the UK to be 6% below our baseline forecast by 2020 if voters elect to leave."
This is broadly in line with most forecasts I've seen. I believe the Bloomberg document I saw made reference to 4% over the same period, though not quite as extreme. However, what has not been discussed is what form the UK's relationship with the EU would take. April's long-term forecast report from the Treasury (link here) gives slightly different numbers, though still not a pretty read:
| EEA | Negotiated bilateral agreement | WTO only | |
|---|---|---|---|
| GDP level % - central | -3.8 | -6.2 | -7.5 |
| GDP level | -3.4 to -4.3 | -4.6 to -7.8 | -5.4 to -9.5 |
| GDP per capita - central | -£1,100 | -£1,800 | -£2,100 |
| GDP per capita | -£1,000 to £1,200 | -£1,300 to -£2,200 | -£1,500 to £2,700 |
| GDP per household - central | -£2,600 | -£4,300 | -£5,200 |
| GDP per household | -£2,400 to -£2,900 | -£3,200 to -£5,400 | -£3,700 to -£6,600 |
Note that these are annualised figures. The report goes on to explain its methodology, but I cannot remember (and am not going to check just yet) how long they anticipated it would take to renegotiate a bilateral deal with the EU. Most estimates seem to say around eight to ten years, so I imagine they have used that when modelling the initial shock over the next 15 years.
I can also confirm how badly the financial services industry would be hit, and to a large extent how badly it has already been affected. Being aware of many positions and having a constant pulse on recruitment (I am recruiting from the City right now), it has been very shocking to see the drastic drop in vacancies over the past few months.
A lot of this financial sector uncertainty hinges on a few key things:
The European Passporting System, as described here by the FSA. Basically, if you are based in one EU country, you can sell financial products and services to any other EU country without having an office established in that country. For the UK, this is enormously important, as London is the typical port of call for American and Asian banks setting up in Europe and using London as a base to sell to the rest of the EU. If the UK did not immediately negotiate to rejoin the EEA and keep the passporting system in place, this is what would drive the exodus from London. I have already seen a few risk-averse companies moving their open vacancies to Dublin and Frankfurt. It would require most non-European companies to set up primary offices elsewhere in Europe, leaving a small London outpost to sell services to the UK specifically. Even if passporting were negotiated as part of a bilateral agreement, the City could not survive without the system for possibly a decade.
Lack of inward investment into the UK. This will hit a lot more than just financial services. The UK's current account deficit is a little over 7% of GDP, which is quite high. Historically, because of this gap, Britain has relied on foreign direct investment to plug the hole. About half of this FDI comes from elsewhere in the EU. This paper from the LSE's Centre for Economic Performace goes into quite a lot of detail, but suffice it to say, we have already seen inward investment to the UK fall to nearly nothing over the last two months as people wait for the results of the referendum. I have no doubt that it will pick back up after the result is known, regardless of what the outcome is, but in the event that Brexit is victorious, there is a lot of doubt as to how much of that FDI will ever come back.
Moving on to things from a retail perspective: in my particular company, approximately 60% of our products are sourced from outside the UK, and of those, nearly all of them are from Europe. In the event that the UK applies to join the EEA during the exit negotiations, this will not likely impact consumers to quite a large extent, although currency volatility and lower investment could lead to small price rises. However, in the event that the UK decides to enter the decade-long bilateral negotiation plan, things will truly go haywire. It has been almost impossible for us to model changes to unit prices if you include tariffs, because we simply do not have the manpower, but the impact of tariffs levied on most goods, in addition to a weakened GBP, makes for pretty ugly reading. I cannot be too specific, but when looking at margins, there were a lot of red numbers on the sheets that would have to be passed onto consumers in the form of 20%+ increases on most items in their weekly shop.
I would also mention that the paper by the Economist seems to take a slightly rosier view of exit negotiations - they seem to be anticipating some sort of Swiss-style EFTA deal where immigration can be put on the table, which a lot of the Leave group have been championing. I am less certain that that will even be a possibility. Put simply, why would it be in the EU's interests to give Britain access to nearly all elements of the EEA, but let one of the 'fundamental freedoms' be compromised to an extent that not even Switzerland has been able to do? When the Swiss voted by referendum to limit the number of Croatians who could come into the country, the EU cut Swiss access to the Horizons 2020 research programme, a huge blow for the country's science and innovation sector. Not only that, but it is in the EU's interests to ensure that no other country will ever try to jump off the ship, and then demand access to all the bits they like. It would spell the end of the European project, and that cannot happen.
As they rightly point out in the introduction, the main impact to the automotive industry (one of the UK's largest manufactured exports) would largely be due to supply chain disruptions, although they make the case later on that reduced consumer spending would hit their sales. This largely seems to square with what the automakers themselves have said, particularly Toyota, who released this statement after the Leave campaign erroneously had them marked as pro-Brexit.
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