Simon Wells, Chief UK Economist at HSBC, suggests that if the UK votes to leave the EU on 23 June, economic and political uncertainty would rise sharply, slowing economic activity. Key Quotes “In the immediate aftermath of a vote to leave the EU it would be unclear what a Brexit would look like. As we have argued for some time, the implications of a ‘soft exit’ (where the UK remained in the European Economic Area or maintained strong ties with the EU) could be very different to a ‘hard exit’ (where the UK withdrew fully from the single market). Clarity on the post-EU arrangement could take some time to emerge, particularly if the UK Prime Minister (and perhaps also the Chancellor) were to resign. But even if new leadership was found swiftly, more pressing problems could engulf the EU as they did last summer. With the latest bookmaker odds showing around a one-third probability of Brexit and the polls suggesting a tighter race, investors cannot afford to ignore the implications of a vote to leave. Investment falls as firms ‘wait and see’: Elevated uncertainty has macroeconomic implications. It affects decision-making by businesses, households and policymakers. One likely consequence of a vote to leave could be that firms delay investment until clarity about the nature of post-EU arrangements emerges. A slowdown in business investment growth has already been indicated by survey data and linked to Brexit concerns. Sterling asset prices fall: Financial investors also dislike uncertainty, which might raise risk premia on sterling financial assets. Of particular importance to an open economy like the UK is the currency response. Our currency strategists expect a sharp fall in sterling in the event of a vote for Brexit. Around one-third of the UK’s CPI basket is imported either directly or indirectly. This suggests a 15-20% fall in sterling could eventually raise inflation by up to 5pp, depending on how much of the depreciation was passed on to consumers. Higher inflation would erode real incomes, leaving households with less to spend. Little near-term boost to trade from lower sterling: Economic theory would suggest that a sharp fall in sterling would provide a boost to net trade. Reduced demand and higher prices should slow import growth, while UK exports should become more competitive. But sterling would have been driven down by uncertainty surrounding future trade arrangements with the UK’s largest trading partner, which could deter potential buyers of UK exports within the EU, despite lower prices (in EUR terms). So it could be a repeat of 2008, when a large sterling depreciation did little to boost trade.” For more information, read our latest forex news.