Britain votes for Brexit - ING

James Knightley, Senior Economist at ING, suggests that it is looking clear now that the UK has voted to leave the EU with the BBC, Sky and ITV calling the vote.

Key Quotes

“Turnout was high at 72% (so far) with strong pro-EU votes in London, Northern Ireland and Scotland along with some other metropolitan districts being offset by very strong anti-EU outcomes in the regions and northern cities. Currently Leave has a lead of around a million votes after 346 out of 382 districts have declared

Financial markets have swung violently through the night with sterling initially rallying on announcements from some polling agencies suggesting a narrow IN outcome soon after voting closed at 10pm. However, as the regional results came in it became increasingly clear that they got it wrong. Sterling has plunged 10% against the US dollar and 9% against the euro while equity futures are down nearly 8% and the 10Y yield up 6bp or so.

In terms of the politics we are still waiting for a reaction from Prime Minister David Cameron. His political future is hanging in the balance despite a letter from 84 Brexit-backing Conservative Party MPs saying he should stay on. It is possible he thinks his position has become untenable and he steps down, but we will have to wait and see.

We now have to wait for parliament to ratify the outcome and then for the UK to formally trigger Article 50 of the Lisbon Treaty in order to start the negotiation process for departing from the EU. The key question will be whether the UK’s divorce from the EU can be a friendly one, which will limit the economic pain, or whether it will break down in acrimony. If it is the latter, a toxic political environment could lead to protracted negotiations, resulting in significant economic distress for the UK and Europe more broadly.

We will also have to wait and see if the Scottish nationalist movement launches a renewed push for independence with several key officials suggesting that a pro-EU Scotland being forced out by the votes of the English has triggered the “material change” clause that could lead to such an outcome.

This huge degree of political uncertainty is going to be massively disruptive for the economy. Trade gets the headlines, but nothing will change on this for two years and in actual fact the plunge in sterling could be beneficial in the near term. We are more worried about the hit to business sentiment given surveys suggested 75% of UK firms wanted the UK to stay in the EU. This suggests weaker investment spending and slower hiring. Foreign investors are also likely to take a dim view of putting money to work in the UK given the uncertainty over its future relationship with the EU.

The Bank of England will now have to decide whether it needs to step in and support the economy in some way. While the plunge in the currency is certainly a loosening of financial conditions, the bank may be worried about domestic activity. We certainly acknowledge that inflation will be pushed higher by sterling’s collapse, but we think the BoE will look through this, as they did in 2011 and focus on the growth risks, which will dampen inflation pressures in the medium term. As such, we see a strong probability of an interest cut in the near future.

In terms of Europe, there are political implications, which may boost anti-EU parties elsewhere in Europe ahead of elections in Spain, Netherlands, France, Germany and Italy over the next 18 months. There will also be economic contagion, particularly for EU countries that do significant trade with the UK – the Netherlands, Ireland and Belgium look most at risk – partly from a weaker UK growth rate, but also a less competitive exchange rate versus sterling. Europe will also have to think about how it fills the gap of the UK’s financial contributions while there will also be financial contagion risks given cross border banking linkages.”