21 Jun 2016

If Brexit must be, let’s hope fallout is short-term

The following opinion piece first appeared in the Herald Sun on 21 June 2016.

By Alan Oster, NAB Chief Economist, and Nick Parsons, NAB Head of Research, UK & Europe, and Global Co-Head of FX Strategy

 

The referendum on Britain’s continued membership of the European Union has now captured attention worldwide. It’s not just a local matter, but an event that has potential global ramifications.

On Thursday, Britons head to the polling stations to decide the fate of their nation for decades to come. Right now, polls suggest it’s too close to call. So how did it come about, what are the issues and what does this mean for Australia, given we’re 15,000km from the action?

During the last election campaign, British Prime Minister David Cameron saw growing evidence his Conservative Party was losing votes to the UK Independence Party, which was campaigning on a promise to leave the EU. Mr Cameron said that if his party won, a referendum would be held on EU membership within two years of gaining office.

For Britain, the referendum comes at a time when fears are crystallising on three issues: the power of unelected bureaucrats in Europe, the flow of people to and within Europe and job insecurity felt by many British workers.

Suddenly, a referendum about maintaining Britain’s relationship with Europe had become a nationwide debate about immigration, jobs and sovereignty.

When it comes to the global economy, no serious commentator argues that a vote to leave the EU would have positive economic consequences in the near term.

Uncertainties about trade would have a big negative effect on British business and consumer confidence, investment, output and employment.

What’s more, if Britain votes to leave then it’s possible that it won’t be the last country to give separation a go. That really is the big issue. Support is growing in France, Germany and Italy for political parties that want to leave the EU, and the economic situation in Greece showed the world the depth of anti-EU feeling.

A vote to leave wouldn’t just be a local affair. An existential crisis about the future of Europe would send stock markets tumbling around the world.

So what does it all mean for the Australian economy?

A vote to leave would cause considerable financial market and currency volatility, like the sort we witnessed at the start of the year. Australian equity markets may fall significantly and the Australian dollar as a “risk on” currency could be vulnerable.

What happens next depends on how long this volatility lasts. If it is relatively short-term in duration (as was the case in early 2016) the effects on the Australian economy are likely to be negligible.

However, if markets stay disrupted for longer, there’s a chance economic growth could be affected.

While our judgment is that short-term volatility is more likely than long-term, the reality is there’s a high degree of uncertainty.

But we think it’s important to remember that Australia is approaching any global volatility from a position of relative economic strength.

Low interest rates and a weaker Australian dollar are helping our service sectors, such as tourism, retail and financial services, lead Australia’s growth charge of 3.1 per cent in the first quarter of this year.

Businesses are telling us conditions and their confidence are well above the long-term average. The National Australia Bank’s monthly business survey for May also expects about 15,000 jobs per month to be created in the coming six months, which, if realised, would mean that the unemployment rate edges lower.

Our major trading partners are countries such as the US and China, where services sectors are doing well, and in Asia where there is demand for goods and our expertise in areas including health, education and agriculture.

And of course, all this speculation hinges on the big unknown: what the British people will decide.

Because at the end of the day, they could always vote to stay in the EU.

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