The UK will remain in the European Union, predict Swedbank economists. The possibility of UK leaving the EU, or Brexit, is given a 40% probability. Brexit would result in a negative impact on Baltic States and Eurozone in general. This impact will be expressed by more serious fluctuations on financial markets, trade obstacles and political instability in Europe.
This would also mean more uncertainty for the monetary policy and slower economic growth in Baltic States and Eurozone, as concluded in Swedbank’s latest thematic outlook.
If the UK remains in the European Union, there will be a positive rebound in stock prices and value of the British pound after the 23 June referendum. The current exchange rate for GBP is close to EUR 0.0785. It may become weaker in the next month. Swedbank economists predict that the value may grow to EUR 0.75 after the referendum. It is possible the Bank of England may raise the base rate in Q1 2017.
Swedbank estimates the probability of Brexit at 40%. Results of the most recent Financial Times survey show that 46% of British residents are in favour of their country remaining in the EU. 43% are in favour of it leaving the union. 10% of residents are unsure how to vote.
In the event of Brexit, both the UK and the EU would become politically and economically weaker. Estimates of different institutions show that negative influence on UK’s GDP could be within 0.1-0.9 percentage points in the event of Brexit, comments Swedbank Latvia head economist Martins Kazaks.
Negative influence on Eurozone and Baltic States may be indirect and significantly smaller in comparison. It will be felt through stress on financial markets. The effect will be felt mainly in short-term perspective – large fluctuations, weaker GBP, possible decline in stock prices and bond yield. In impact on Baltic States will be similar to Eurozone, even lower, considering very low debt levels. It is expected that the value of GBP will drop by at least 5% in comparison to USD. It is also possible that GBP may become weaker in comparison to EUR. In a medium-term perspective (if impact on Eurozone’s economy turns out considerable) the European Central Bank may decide on putting off stimulating measures and raising rates to a later date, thereby retaining the negative interest rates and increasing asset bubble risks, the economist explains.
He adds that Baltic States export 3-5% of all their goods to the UK (Latvia exports around 5%). The British market is especially important to industries like woodworking and mechanical engineering. If GBP becomes weaker than EUR, export flow to the UK may reduce as well. Nevertheless, negative impact in general is expected to be rather limited. At the same time, however, the slower the growth becomes in the UK, the weaker demand for Baltic goods and services there will be.
«Political consequences will likely have the largest negative impact – more challenging cooperation inside the EU and more politically fractured Europe in general, larger possibility for radical/populist political powers to increase their influence, the necessity to put off structural reforms, larger geopolitical uncertainty, etc. We may see similar referendums in other EU member states, which could increase uncertainty even more. These consequences will definitely impact Baltic States, slowing their economic growth,» – adds Kazaks.