Over the next eight days, the global community could be faced with a situation so devastating – so dire – it could destroy the European Union (EU), as we know it.
At least that’s what we’re told.
Just days before UK voters head to the polls to vote on a referendum to potentially exit the European Union, pro-European Union reports have been bombarding voters with horror stories of a recessionary nightmare that’d follow a confirming Brexit vote.
The fear is palpable, and Brexit has already been called the “biggest domestic risk” to financial stability. In response, investors have been rushing to gold safe havens, forcing the yellow metal up 6% since the month began, and 20% since January 2016.
Hedge funds are hoarding gold too and George Soros and Stanley Druckenmiller have recently increased their positions in gold.
The Brexit Threat
The Chancellor of the Treasury, George Osborne announced that up to 800,000 jobs could be lost if the UK exits the EU. The Institute of Fiscal Studies (funded by the EU) noted that an exit could cost the UK between $30 and $60 billion a year. The UK Treasury also believes the UK could see a sharp recession for at least a year after the exit.
“The last recession saw our economy shrink by 7.2%. A similar shock, post-Brexit, would cost our country over 133 billion. A fall in GDP of just 0.6% would be enough to wipe out any savings the Leave (the EU) side claims they’d make. Most economists expect a recession in the event of a Brexit vote – we would be worse off,” notes Liberal Democratic Economic Spokesperson, Susan Kramer.
Such a move would destroy hundreds of thousands of UK jobs, and create currency turbulence, say others.
On the Other Hand
Meanwhile, the “Leave” crowd notes that an exit from the EU could save the UK $500 million in weekly contributions. Such reports from both sides of the fence reflect the incessant frustrations, insults and exaggerated claims of what may happen.
To be honest, no one knows for sure what consequences a potential exit could bring.
However, we think a crippling UK recession is unlikely. To have such a recession, the UK would need to experience a severe credit crunch, a significant shock to the economy, say analysts.
With the Bank of England pledging to provide necessary liquidity on an exit. Some economists believe an exit would only decrease UK growth by 0.4% growth in 2016, and perhaps by 0.9% in 2017…
However, even if the UK exits the EU, it could create a great fire-sale opportunity, which Andrew Mickey pointed out in an article this week. From past experience, we know that even in times of excessive pessimism and panic, markets are resilient.
A few months from now, the Brexit chaos will be a distant memory… and market resiliency will lead to potentially rewarding gains for smart investors.