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UK: Cameron’s campaign time – ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 18, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    James Knightley, Senior Economist at ING, suggests that today sees the start of the EU summit that Prime Minister David Cameron hopes will see a deal struck that can allow him to campaign for the UK remaining a member of the EU at a 23 June referendum.

    Key Quotes

    “Comments from both the UK government and the EU suggest that a deal is in place and today and tomorrow’s EU leaders’ summit in Brussels should see this secured and signed despite last minute negotiations over some of the welfare benefit exclusions. Press reports suggest that PM Cameron will then head back to London on Friday afternoon to brief his senior ministers on the agreement.

    This will then allow those Ministers that want the UK to leave the EU to break rank and actively campaign for Brexit. They will most likely include the Secretary of State for Work and Pensions, Ian Duncan Smith, and Chris Grayling, Leader of the House of Commons and so we will then see the formal campaigning start.

    Indeed, probably next week, Cameron is likely to confirm that the referendum will be held on Thursday, 23 June. The general assumption is that there will be at least ten weeks of campaigning and then 28 days before the vote there is a purdah period, during which the Government cannot use public resources to publish information that could sway the vote.

    At present the opinion polls suggest the vote is looking incredibly close. In most polls, those wanting to stay in are narrowly in front of those wanting to leave, but it is important to point out there are a large proportion of people who are undecided, typically around 20% of the electorate. Consequently, how the “deal” is explained, and possibly most significantly, how the press portrays it, will be critical to determining whether the UK stays in the EU.

    The problem for Cameron is that the bulk of the UK popular press is fairly hostile to the EU. In an environment where UK households have little time for the European Union, Cameron is going to have to make the economic case for remaining in the EU. UK businesses and trade unions are broadly in favour of remaining and Cameron is going to need for these groups to become more vocal too. As such we are going to be seeing even more focus on the opinion polls, which implies that volatility is likely to be high for UK asset prices and sterling in particular.

    Should the UK vote to leave, Brexit raises clear risks for trade and investment and, by implication, growth and jobs. 2017 GDP growth could slow to 1.5%, some 1.2% below what it might have been, EUR/GBP would likely move towards the 0.90 mark and the Bank of England may loosen monetary policy. This outcome could also fuel the campaign for Scottish Independence, which would compound the effects.

    The damage might prove short-lived. A trade deal would need to be agreed within two years and bi-lateral deals agreed with non-EU countries. Once the situation stabilises, growth prospects should improve – helped by a weaker currency and low interest rates, but the BoE may be forced to subsequently tighten policy aggressively to combat inflation risks. The UK’s prospects would then be driven by what the post-Brexit Conservative government tried to do with its new found “freedoms”.”
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