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May 24, 2016

What to Expect with a Possible Brexit?

Hold onto your seat, it could be a bumpy ride if the UK votes for a Brexit!

Proponents and opponents of a Brexit are anxiously attempting to convince as many Britons as possible of the reasons why a Brexit should be adopted or rejected. On the one hand, you have the stay campaign championed by Prime Minister David Cameron, Chancellor of the Exchequer George Osborne, IMF chief Christine Lagarde, G7 leaders and of course President Barack Obama. Notable business leaders are divided on the merits of a Brexit, and various high-level discussions are ongoing. 

Leading the charge for the UK to remain in the EU is Chancellor George Osborne. He recently stated that up to 820,000 jobs could be shed in the UK by 2018 if indeed a Brexit comes to pass. According to Osborne and the UK Treasury analysis, economic growth could be severely impacted to the tune of 3% – 6% within that timeframe. Prime Minister David Cameron has gone a step further and called the Brexit vote one of the most significant votes in the history of the UK, even more important than the upcoming general election. In his own words, he indicated that a Brexit vote was a self-destruct option for the United Kingdom.

Plenty of Cannon Fodder for Brexiteers and Remain Camp

But not all politicians share the views of the mainstream Tory party and its ministers. The former mayor of London, Boris Johnson has described the position of Prime Minister David Cameron and his colleagues as scare tactics and propaganda, while the foreman Chancellor, Lord Lawson has also weighed in with similar sentiment to Boris Johnson. Indeed, there appears to be a pretty even split between those wanting the UK to exit the EU and those wanting to remain with the status quote. There is no doubt that the reports issued by the government are unusually pessimistic, and this supports the opposing view that government is using all tools at its disposal to scare British voters. The historic vote will be taking place in 23 June 2016, virtually one month to the day. According to the Treasury Department, GDP (gross domestic product) would decline and the GBP would plunge by as much as 12%.

WTO Default Could See 820,000 Jobs Lost

In the short-term, upwards of 520,000 jobs would be lost and the average wage would decline by as much as 2.8%. The shocks will not be limited to those sectors alone, with the housing market being heavily impacted. A plunging GBP would invariably give rise to a higher interest rate which would then make it extremely difficult for first-time homebuyers and those already on mortgages to afford the monthly repayments especially with a floating repayment. According to the treasury, the real shock would take place when the UK exits the European Union and then assumes membership of the WTO (World Trade Organization). In that instance, gross domestic product may decline by as much as 6% and the full quote of 820,000 jobs would be lost.

Politicians and heads of institutions like the IMF, Bank of England et al are certainly using their bully pulpits to drive home the message they want voters to hear. The fact of the matter is that there are plus and minus points to a Brexit and it is virtually impossible to know with any degree of certainty what outcome may result either way. 

As it stands, the UK is already showing economic weakness – irrespective of the Brexit vote. Q2 2016 is expected to bring about poor employment, growth and prospects. The Brexit vote is causing additional anxiety, but recent polls suggest that the stay campaign has the ascendancy and will likely get its way.

Author Bio: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise for the globally renowned spread betting company –InterTrader.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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