However Brexit vote goes, UK economy is in trouble

Pedestrians walk past the Bank of England (BOE) in the City of London, U.K.
Luke MacGregor | Bloomberg | Getty Images
Pedestrians walk past the Bank of England (BOE) in the City of London, U.K.

Severing ties to Europe may help Britons regain a sense of independence and better control over their nation's destiny. It will do little, though, to help their economy, according to analysts.

The U.K. is close to slipping into another recession, and that will likely influence the vote of many who head to polls on Thursday to decide whether the country should stay in the European Union, or leave it.

Gross domestic product advanced by just four-tenths of a percent in the first quarter of this year, down from six-tenths of a percent in the fourth quarter of 2015. That's the slowest rate since the fourth quarter of 2012, according to the Office for National Statistics. Some of the blame goes to uncertainty over the outcome of the upcoming referendum, scheduled for Thursday.

The leave argument rests heavily on the notion that, once freed from an oppressive thicket of EU regulations spewed by Brussels bureaucrats, Britain's feeble economy will once again regain its glory as a fully independent world power.

But if voters approve an exit from Europe's political and economic bloc, most analysts are forecasting severe economic withdrawal pains.

If the leave vote prevails, Britain's GDP growth this year will drop from an expected 1.8 percent to 1.4 percent, according to IHS Global Insight's chief European economist, Howard Archer. Next year's growth forecast "could well be taken down from 2.4 percent to 0.8 percent," he said in a recent note to clients.

"There is a very real risk that the economy may not bounce back that well in the second half of 2016 — even if there is a vote to stay in the EU," he said.

But regardless of which way Britons vote, the U.K. faces a tough set of economic problems — including a credit drought since the 2008 crisis, a widening trade deficit with Europe, stagnant wages and a lack of domestic demand — that won't be cured by severing ties with the European Union.

"We anticipate (those problems) will prevail long after the Brexit vote has been counted," said Carl Weinberg of High Frequency Economics.

British officials have warned that departing the EU could wreak havoc with the nation's finances. Last week, U.K. Finance Minister George Osborne, who along with Prime Minister David Cameron favors staying in the EU, said he would have to respond to a leave vote with tax rises and spending cuts worth £30 billion ($43 billion).

"There will be a big hole in the public finances and ... we would have to raise taxes and cut spending," Osborne told reporters last week.

Bank of England Governor Mark Carney has also warned that a Brexit could knock the pound sharply lower, stoke inflation and raise unemployment. Earlier this year, the U.K. Treasury released an analysis that said leaving the EU would tip the country into a yearlong recession and lower its growth by 3.6 percent after two years.

A separate Treasury report warned that a vote to leave the EU would cost U.K. households £4,300 ($6,238) a year by 2030 and would make the country "permanently poorer."

Uncertainty over the outcome of the referendum intensified late last week as Britain mourned lawmaker Jo Cox after a man wielding a gun and knife killed the 41-year-old in an attack linked to the referendum. Both sides suspended campaigning after the attack, but a series of polls released over the weekend indicated that the stay camp may have strengthened since the attack.

Despite the warnings of potential economic havoc, voters seemed more focused on a wave of immigration that has brought an influx of arrivals from European economies in even worse shape than Britain's.

Last year, some 630,000 people moved into the U.K., while 297,000 left the country, for a net migration of 333,000. Of those, 184,000 came from the EU, which poses no restrictions on moving from one member country to another.

In 2010, Cameron promised to reduce the annual level of net migration to below 100,000, but the influx of people has continued, thanks, in part, to relatively high wages. In the last four years, the number of migrants who cited work-related reasons for entering the country has nearly doubled, while those coming to further their education or to join family members have fallen.

Despite the dire warnings — of economic mayhem if Britain leaves the EU, or an increase in the flow of immigrants if it stays — some analysts believe the long-term impact has been overblown.

"Even leaders of the leave camp have suggested that Brexit would not actually take place until 2020," Julian Jessop, chief global economist at Capital Economics, wrote in a recent note to clients. "This means that there would be plenty of time for negotiations to clear up some of the most important uncertainties about the wider impact."

Jessop said that, over the long run, the impact of a Brexit vote "may prove to be a damp squib."

(Translation for U.S. readers: "Meh.")

Correction: The Brexit referendum is June 23. An earlier version misstated the timing of the vote.