When you wake up this Friday morning the UK may no longer be part of the European Union. Or not. At the time of writing the polls are very close and most political pundits are loathe to call the outcome.
Not so with the economics community. The chief economists at international agencies such as the OECD and the IMF, the boffins at the Bank of England, and various private sector bank economists are unanimous in saying leaving would be an economic mistake, one that would possibly lead to long-term stagnation of the UK economy.
The basic principle behind their analysis is that larger markets create more competition, which in turn fosters innovation, productivity growth, lower prices, and greater consumer choice. If Brexit occurs there is no doubt that UK goods, services and capital, as well as people, will enjoy less access to the much larger economy across the Channel. Its effective market size will shrink.
The NZIER penned a recent piece drawing out the implications of Brexit for New Zealand. It estimates that our exports to the UK could drop by $190 million per year due to slower UK income growth; negatively impacting the demand for agricultural produce such as sheep meat, wine, apples and pears, wool and honey, as well as crimping the number of UK tourists. This drop in exports is not a particularly big number in itself, but the bigger risk is that Brexit would negatively impact the chances of further global economic integration efforts. Especially at a time when ugly nationalistic, anti-immigration politicians are gaining traction across the global stage.
The basic trade-off voters in the UK face is how much they are willing to risk free access and economic prosperity for greater sovereignty, such as the right to determine immigration and regulatory policies?
The polling in this regard is fascinating.
The majority of young Brits want to stay, including a recent new hire in our office who voted by proxy last month.
In contrast the elderly (who are more likely to be against immigration) and the poor (who are most disaffected by globalisation) are the largest groups clearly in the leave camp. Curiously, global financial markets have not been particularly bothered by the impending vote, despite the catechism that markets hate uncertainty, and that there are no real political, legal or economic precedents to draw upon for Brexit. The pound has wobbled up and down with the polling numbers, and is quite weak year-to-date. But global market volatility remains muted - there was much larger swings when the Greek exit drama was playing out in 2011. London is the financial centre of Europe, Athens is a small out-of-the-way village by comparison.
The lack of volatility could reflect that whether the vote is stay or go nothing much will change on day one. If Brexit prevails the UK will need to go through a two-year, highly technical process to re-negotiate its trade and investment relationships with the EU. In the meantime, unfettered from the EU, the UK could better advance trade deals elsewhere - at least that is the promise of the exit camp. The full ramifications of exit will not be known until the 2020s, should the vote go that way. And of course it might not, the desire for young Brits to stay could prevail.
- Aaron Drew is chief investment officer with Hastings-based wealth management company Stewart Financial Group. His show RealWealth can be heard on Radio Kidnappers Tuesday afternoons and on podcast.