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UK Economics | EU Referendum
An Ever Closer Call
M O R G A N S T A N L E Y R E S E A R C H
E U R O P E Morgan Stanley & Co. International plc+
Jacob Nell [email protected]
+44 (20) 7425 8724
Melanie Baker [email protected]
+44 (20) 7425 8607
20 April 2016
Overview
We expect:
Outcome: A close referendum on June 23, and we currently assign a 60% probability for Remain and a 40% probability for Leave.
Impact:
(a) Before the vote: Referendum uncertainty to contribute to a mid-year slowdown, impacting investment and risk assets in particular, with the impact increasing with the perceived probability of a vote to Leave.
(b) After the vote: With a vote to Remain, we would expect a rebound in investment and growth, reflation and a start to rate normalisation. With a vote to Leave, we would expect an increase in political and economic uncertainty. We would expect this to hit investment hard, and push the economy close to recession, but the downside to be cushioned by easier policy. Risky assets, including sterling and equities, would be most impacted, in our view.
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
M O R G A N S T A N L E Y R E S E A R C H
2
April 20, 2016
1. Renegotiation and the road to the referendum slides 3-8 We got a UK deal with the rest of the EU on revised terms of membership on February 19 2016, including an opt-out from
ever-closer union, safeguards for Euro Outs, and greater controls on immigration, including restrictions on migrant benefits.
2. Probability of Remain and Leave slides 9-14 The referendum will be held on June 23 2016. With Boris Johnson joining the Leave campaign, and evenly divided opinion, we
see a close outcome as likely, and assign a 60% probability for Remain, 40% probability for Leave.
3. Vote to Remain: Political and economic impact slide 15 After a vote to Remain, we see some risk of continuing division in the Conservative party. In terms of the economy, we would
expect a rebound in investment and growth, continued reflation and a start in 1Q-17 to rate normalisation.
4. Vote to Leave: Political impact slides 16-18
In the aftermath of a vote to Leave, the political situation would likely move faster than the economic relationship with the EU.
There would be risks of an accelerated change in Prime Minister and another Scottish independence referendum.
5. Vote to Leave: Economic impact slides 19-28 We see a significant economic cost from a vote to Leave. Near term, we think the uncertainty would hit growth, reducing UK
growth by ~1.5pp and eurozone growth by 0.8pp over 2016-17. Actual exit, probably 2019, would likely lead to reduced access
to EU markets, reduced inflows of capital and labour, and lower trend growth. The only concrete economic benefit we can see
is a fiscal saving of ~0.3% of GDP pa.
6. Overview: UK and Europe slide 29-30
Asset implications
For more detail on asset implications, see our cross-asset report on Brexit, and our report on What Brexit would mean for
Europe (March 7, 2016)
Content and MS Core Views
M O R G A N S T A N L E Y R E S E A R C H
3
April 20, 2016
A. UK and Europe - Partly in and partly out
UK stands aside in the 1950s, as European integration started. UK joins in 1973, confirmed in the 1975
referendum. UK promotes single market and enlargement, argues over CAP and budget, stands aside
from euro and Schengen
B. The strength of UK Euroscepticism
Conservative party divided on Europe, UKIP a significant electoral challenge – eg gained largest share of vote in the 2014 European Parliament election.
“…democratic consent for the EU in Britain is now wafer thin… That is why I am in favour of a referendum…. It is time to settle this European question in British politics.” PM Cameron, Bloomberg speech, January 2013
1. The Road to the Referendum
M O R G A N S T A N L E Y R E S E A R C H
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April 20, 2016
1. Timeline
Steps on the Road to the Referendum
Event Dates
UK general election 7 May 2015, Conservatives formed a majority government
European Council 25-26 June 2015; Cameron outlined UK proposals
European Council 14-15 October 2015; UK committed to write with proposals
European Council 17-18 December 2015; 4 hour discussion of UK proposals
European Council 18-19 February 2016; deal reached on evening of 19th
European Council 7 March meeting with Turkish PM on migration
European Council 17-18 March 2016
UK local/regional elections 5 May 2016
EU referendum 23 June 2016
European Council 23-24 June 2016
European Council 20-21 October 2016
European Council 15-16 December 2016
French presidential elections April-May 2017
UK Presidency 2H 2017
German elections August-October 2017
Some key EU milestones around the UK referendum…… …And some key UK dates
Source: Morgan Stanley Research
UK tables reform
proposals
UK tables reform
proposals
Referendum bill passes
Referendum bill passes
Negotiations concluded
Negotiations concluded
Government calls
referendum
Government calls
referendum
Electoral Commission designates
lead campaign groups
Electoral Commission designates
lead campaign groups
Referendum Referendum
Nov-15 Dec-15 19-Feb-16 23-Feb-16 13 April-16 23-June-16
Some milestones Date
Designation of lead campaigns 13 April 2016
Referendum period starts 15 April 2016
Obama visit ca. April 22-25
TSC hearing on Treasury analysis of Brexit 28 April 2016
UK local elections, regional elections (including to the
Scottish parliament) and London mayoral elections05 May 2016
Inflation Report 12 May 2016
TV debate (BBC, Glasgow) 19 May 2016
Purdah starts 26 May 2016
TV debate (BBC) 15 June 2016
TV debate (BBC, Wembley) 21 June 2016
Referendum 23 June 2016
M O R G A N S T A N L E Y R E S E A R C H
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April 20, 2016
1. Renegotiation – The February Deal
Source: Prime Minister’s Office, European Council, Morgan Stanley Research. Colour indicates an MS “traffic light” assessment of the relative difficulty of achieving UK negotiating objectives, ranging from green (easy) to yellow (more difficult) to red (most difficult).
UK areas of negotiation, set out in a November 10 letter from David Cameron, UK Prime Minister, to Donald Tusk, President of the European Council. Tusk responded in a December 7 letter, indicating that only migration looked a major negotiating challenge. On February 2, Tusk set out draft proposals for the February Council, which Cameron responded to in a February 2 speech and a February 3 statement to the House. The diplomacy and negotiations culminated in a February 19 deal at the European Council. Dossier 1: Competitiveness
UK Demands: The UK welcomes the focus on a single digital market and a Capital Markets Union and the new trade strategy including trade deals with America (TTIP), China, Japan and ASEAN. The UK would like to see
a target to cut the regulatory burden on business. The EU should also do more to fulfil its commitment to the free flow of capital, goods and services. EasyDeal: " the relevant EU institutions and the Member States will make all efforts to strengthen the internal market ...will take concrete steps towards better regulation, ... lowering administrative burdens and compliance costs on
economic operators, especially SMEs, and repealing unnecessary legislation... And the EU will pursue an active and ambitious policy of trade."
Cameron assessment: Good progress - a declaration about completing single markets and setting targets to cut red tape
Dossier 2 - Sovereignty
UK Demands: A formal, legally binding and irreversible UK opt-out from the commitment to "ever closer union". Enhance the role of national parliaments, by proposing a new arrangement where groups of national
parliaments, acting together, can stop unwanted legislative proposals. The precise threshold of national parliaments required will be a matter for the negotiation. EU's commitments to subsidiarity fully implemented.
Deal: "The Treaties allow an evolution towards a deeper degree of integration among the Member States that share such a vision...without this applying to other Member States…It is recognized that the UK...is not committed to
further political integration into the EU. [This will be incorporated into the Treaties at the time of their next revision...]... Where reasoned opinions...represent more than 55 % of the votes allocated to the national
Parliaments,...the representatives of the Member States...will discontinue the consideration of the draft legislative act in question... DifficultCameron assessment: Good measures - a specific carve-out from "ever-closer union", power for national parliaments to block measures, an annual discussion on sending powers back to states
Dossier 3 - Economic Governance (MS gloss: Protection for Euro-Outs)
UK Demands: The UK seeks legally binding principles that safeguard the operation of the EU for all 28 Member States and a safeguard mechanism to ensure these principles are respected and enforced . These
principles include: i) The EU has more than one currency; ii) There should be no discrimination and no disadvantage for any business on the basis of the currency of their country; iii) Integrity of Single Market must be
protected; iv) Any changes the Eurozone decides to make, such as the creation of a banking union, must be voluntary for non-Euro countries; v) Taxpayers in non-Euro countries not financially liable for operations to support
the Eurozone as a currency; vi) Financial stability and supervision remain a competence for national institutions for non-Euro members; vii) Issues that affect all Member States must be decided by all Member States.
Deal: Discrimination between euro ins and outs is prohibited. Any difference of treatment must be based on "objective reasons". Legal acts directly linked to the functioning of the euro area are to respect the internal market,
not discriminate in trade between member states and respect the "competences, rights and obligations" of euro outs. Euro outs promise not to impede legal acts relating to the functioning of the euro area. Euro area emergency
financial stability measures won't be paid for by euro outs. Financial stability measures (including macro pru) are a matter for euro-outs own authorities - subject to respecting the common rulebook on the single market in
financial services.
Cameron assessment: Proper recognition that you can have more than one currency in the European Union, a set of principles to implement this - no disadvantage no discrimination, no eurozone costs for non-eurozone
members - and a safequard mechanism - elevation to heads of state.
Dossier 4 - Immigration
UK Demands: Restricting access to welfare and services for EU migrants - for instance requiring a minimum four year period of residence before EU migrants can claim entitlement to certain benefits- in the hope that
this may reduce the inflow. When new countries are admitted to the EU, free movement will not apply until their economies have converged with existing member states.
Deal: Child benefit indexed to the standard of living where the child resides for new migrants from deal coming into force and for existing migrants from 2020; 2) A 7 year "emergency brake" which restricts migrant access to
benefits for 4 years, and will be enacted from the deal coming into force. Also restrictions on sham marriages and suspected terrorists.
Cameron assessment: A very big change, a strong and powerful package - an emergency brake allowing the UK not to pay in-work benefits in full for four years, as well as paying child benefit at local rates, plus measures
to crack down on immigration through sham marriages
M O R G A N S T A N L E Y R E S E A R C H
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April 20, 2016
1. Key issue: Migration
Source: ONS, Morgan Stanley Research
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
- 150
- 50
+ 50
+ 150
+ 250
+ 350
+ 450
+ 550
2005 2007 2009 2011 2013 2015 (YTSep)
non-EUEUBritishnet migrationnet migration targetEU as % of non-EU migration (rhs)
EU net migration still lower than non-EU migration, but
rising
Immigration seen as a top 3 "issue of concern" to
the country
Source: Yougov
Source: Eurostat, Morgan Stanley Research. Data for 2013.
UK is middle of the pack – and similar to France and Germany – in stock of both EU and non-EU migrants
0.0
5.0
10.0
15.0
20.0
25.0
Lie
ch
ten
ste
in
Lu
xe
mbo
urg
Sw
itze
rla
nd
Cyp
rus
Au
str
ia
Ire
land
Sw
ed
en
Be
lgiu
m
Esto
nia
No
rwa
y
La
tvia
Cro
atia
Sp
ain
Un
ite
dK
ing
dom
Ge
rma
ny
Fra
nce
Ne
therl
and
s
Gre
ece
Slo
ve
nia
Ice
land
De
nm
ark
Ma
lta
Ita
ly
Po
rtu
ga
l
Fin
lan
d
Lith
ua
nia
Hu
nga
ry
Cze
ch
Re
pub
lic
Slo
va
kia
Po
lan
d
Bu
lga
ria
Ro
man
ia
Born in another EU Member State, % of population Born in a non-EU country, % of population
32.3,11.0
10.641.4
0
10
20
30
40
50
60
70
80
90
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15
Health Immigration Economy Europe
M O R G A N S T A N L E Y R E S E A R C H
7
April 20, 2016
1. Key issue: Migration
EU migrants, particularly from Eastern Europe, have
low claimant rates
Source: Ipsos Mori, Morgan Stanley Research. Survey respondents are read a list of ways in which the UK-EU relationship could change and are asked whether it would make them more likely to vote to leave/remain in the EU.
Restrictions on migrants may prove key to the Brexit
debate, based on poll done pre-deal
Source: DWP, ONS, Morgan Stanley Research
62
66
70
74
78
82
86
UK EU o/w A8 Non-EU
Average 2005-2014 2015
EU migrants, particularly from Eastern Europe,
have high employment rates
0
5
10
15
20
25
30
35
40
Benefit restrictions Restrictions on free movement
All Leave supporters
% more likely to vote to remain
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
UK born non-EU born EU-15 born EU-8 born EU-2 born
Working age benefitclaimants, as % of employed
Source: ONS, Morgan Stanley Research Source: ONS, Morgan Stanley Research
Since the May 04 enlargement, EU migration has
accounted for half of the UK’s additional 3 mn jobs
17%
9%
31%7%
36%UK
EU14
EU8
EU2
Non-EU
M O R G A N S T A N L E Y R E S E A R C H
8
April 20, 2016
1. Assessment of Deal - “Thin Gruel” vs “Best of Both Worlds”
“This deal has delivered on the
commitments I made at the beginning of
this renegotiation process… I believe it is
enough for me to recommend that the
United Kingdom remain in the European
Union... Our plan for Europe gives us the
best of both worlds. It underlines our
special status through which we will be in
the parts of Europe that work for us, … but
we will be out of the parts of Europe that
don’t work for us. …I believe we are
stronger, safer and better off inside this
reformed European Union. And that is why
I will be campaigning with all my heart
and soul to persuade the British people to
remain in the… European Union.”
Source: PM's statement after European Council
meeting, 19 February, No. 10 Downing
Street
The 'Best of Both Worlds' argument will be deployed in the Remain campaign
Source: Morgan Stanley Research
Defence
Currency
Borders
Sovereignty
Seat at the top table
Single market
Cooperation with partners
The Dossiers Importance for referendum Easy to Negotiate? Material Change? Impact on vote for "Remain"
1. Competitiveness Low Yes No Mild positive
2. Sovereignity Medium No No Mild positive
3. Economic Governance Medium In some respects Yes Positive
4. Immigration High No Yes Unclear
MS Assessment – A strengthening of the UK’s special status, with competitiveness and sovereignty changes largely presentational, and economic governance and immigration changes more substantive
Source: Morgan Stanley Research. Colour indicates an MS “traffic light” assessment, ranging from green (easy/positive) to yellow (mixed) to red (difficult/negative).
Leave campaigners: argue that the deal is “thin gruel” with no meaningful reform or repatriation of powers to the UK
M O R G A N S T A N L E Y R E S E A R C H
9
April 20, 2016
2. Referendum: State of Public Opinion
YouGov tracker – a recent shift to remain
Telephone polls have shown a solid lead for remain –
but narrowing sharply
Source: YouGov, Morgan Stanley Research. Note that YouGov changed their methodology in February 2016
20
25
30
35
40
45
50
55
2012 2013 2014 2015 2016
Poll Results: % Voting Intentions
Leave EU Remain in EU
Source: whatukthinks.org, Morgan Stanley Research, telephone polls only
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
25%
30%
35%
40%
45%
50%
55%
60%
65%
Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16
Remain a member of the EU
Leave the EU
net balance (average of last 6 polls, rhs)
Internet polls roughly 50-50
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16
Remain a member of the EU
Leave the EU
net balance (average of last 5 polls, rhs)
Source: whatukthinks.org, Morgan Stanley Research, internet polls only
15%
25%
35%
45%
55%
65%
75%
Jul-15 Sep-15 Nov-15 Jan-16 Mar-16
Brexit Remain
Predictive markets little changed – ca. 1/3 risk of Leave
Source: Betfair
M O R G A N S T A N L E Y R E S E A R C H
10
April 20, 2016
2. Referendum: Why Remain is our base case
Cameron seemed important to people in deciding
how to vote
Source: Ipsos Mori (fieldwork 13-16th February), Morgan Stanley Research. In answer to question: Who will be important to you in deciding how to vote in the referendum on EU membership. Respondents were asked to chose from a list of names.
6pp+ hidden bias to status quo?
Source: ukpollingreport.com, Morgan Stanley Research. Dates of polls used: (AV: 8/4/11-1/5/11; Scotland: 14/8/14-17/9/14; General election: 7/4/15-6/5/15)
-2
0
2
4
6
8
10
12
Average of polls over finalmonth
Outcome Hidden bias to status quo
AV referendum (May 2011): Lead for no change in electoral system, pp
Scottish independence referendum (Sept 2014): Lead for remain in UK, pp
General election (May 2015): Lead for Conservatives over Labour, pp
3627
Our simple referendum tracker
Source: whatukexpectseu.org, Betfair, Morgan Stanley Research. As explained inside, we translate the probability of a vote to Leave into a 10 point scale (on the left hand side) for the monthly average score obtained under each predictive technique, and then aggregate across the three high frequency predictive techniques to generate an approximate probability of a vote to Leave ( on the right hand side)
Source: BES, BSA, Morgan Stanley Research
“Gold standard” face-to-face polls supported remain
0% 10% 20% 30% 40% 50%
David Cameron
Boris Johnson
Theresa May
George Osborne
Jeremy Corbyn
Stuart Rose
Nicola Sturgeon
Nigel Lawson
Nigel Farage
None of them
Don't know
0
5
10
15
20
25
30
35
40
45
0
1
2
3
4
5
6
7
8
9
10
Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 April 16so far
Telephone Polls
Internet Polls
Predictive Markets
Combined Score, % risk of Leave, rhs
0
10
20
30
40
50
60
70
Remain Leave Balance forRemain
Do you think thatBritain shouldcontinue to be amember of the EU orshould it withdraw?(BSA2015)
If there was areferendum onBritain's membershipof the EU, howwould you vote?Leave or Stay(BES2015)
M O R G A N S T A N L E Y R E S E A R C H
11
April 20, 2016
2. Referendum: Why Leave is not just a tail risk
An unenthusiastic attitude towards the EU compared
to peers
The British are the least likely to identify as partly
European of all the EU nationalities
Source: In answer to the question "In general, does the EU conjure up for you a very positive, fairly positive, neutral, fairly negative or very negative image?", with the net balance defined as the total positive (= fairly and very positive) minus the total negative (=fairly or very negative). We have not included Luxembourg. Eurobarometer Spring 2015, Morgan Stanley Research
Source: Eurobarometer, Morgan Stanley Research
-15
-5
5
15
25
35
45
55
65
Ire
land
Ge
rma
ny
Po
rtu
ga
l
De
nm
ark
Be
lgiu
m
Fin
lan
d
Ne
therl
and
s
Sw
ed
en
Fra
nce
Sp
ain
Ita
ly
UK
Au
str
ia
Gre
ece
Total Positive Total Negative
Net Balance
%
10
20
30
40
50
60
70
UK
Cyp
rus
Gre
ece
La
tvia
Bu
lga
ria
Cze
ch
Re
pu
blic
Au
str
ia
Ire
land
Lithu
ania
Po
lan
d
Po
rtu
ga
l
Ro
man
ia
Fin
lan
d
Slo
ven
ia
Hu
nga
ry
Esto
nia
Fra
nce
Slo
va
kia
Ita
ly
De
nm
ark
Be
lgiu
m
Sw
ed
en
Cro
atia
Spain
Ma
lta
Ne
therl
and
s
Ge
rma
ny
Lu
xe
mbo
urg
In the near future do you see yourself as ...? (% choosing nationality only)
May 2015
A Eurosceptic trend in UK public opinion over time
Source: British Social Attitudes, Morgan Stanley Research
-50
-40
-30
-20
-10
0
10
20
30
-80
-60
-40
-20
0
20
40
60
80
100
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
08
20
12
20
13
20
14
Work for single European government
Stay in EU and increase its power
Leave things as are
Leave the EU
Stay in EU but reduce its powers
Balance of opinion (RHS)
Leave has a heavy lead on key issue of concern
Source: ORB, averaged scores from March and April polls. Choices in response to a list of 8 options describing how the respondent intends to use their vote in the referendum
0
5
10
15
20
25
30
35
Remain Leave
To secure the besteconomic position forthe UK
To secure control ofimmigration and theUK's borders
M O R G A N S T A N L E Y R E S E A R C H
12
April 20, 2016
2. Referendum: Potential Pathways to Leave
Pathway 1 – low turnout, and high turnout among Outs
Remain lead disappears among those certain to vote
Source: Ipsos Mori (polling fieldwork between 19-22 March 2016), Morgan Stanley Research
0
10
20
30
40
50
60
70
80
90
15-24 25-39 40-54 55+
Positive attitude to the EU
Turnout in 2015 general election
Source: Eurobarometer Spring 2015, House of Commons Library, Aliyah Dar, Elections: Turnout, July 2013, BBC
15 referenda have gone against the ‘European’ choice
Source: Wikipedia, Morgan Stanley Research. The Wikipedia source lists 51 European referenda in total, implying a 28% probability of an anti-European vote.
0 5 10 15 20 25 30 35 40 45
RacismMorality
Drug AbusePollution
Public ServicesInflation
TaxAging
EuropePensions
CrimeLocal Government
DefenceHousingPoverty
EducationUnemployment
EconomyNHS
Immigration
Source: Ipsos Mori.
Average number identifying as an issue of concern Jan-Oct 2015
Pathway 2 – attitude to Europe had been “soft”;
referendum vote may therefore be driven by events
Country Year % against Impact
Norway 1972 53.5 Rejected joining the EEC
Greenland 1981 53.0 Voted to leave the EEC
Denmark 1992 50.7 Rejected the Treaty of Maastricht, before approving it with opt-outs.
Switzerland 1992 50.3 Rejected EEA agreement with the EU
Norway 1994 52.2 Rejected joining the EEC a second time
Ireland 2001 53.9 Rejected Treaty of Nice
Switzerland 2001 76.9 Against applying for EU membership
Denmark 2000 53.2 Rejected joining the euro
Sweden 2003 56.1 Rejected joining the euro
France 2005 54.9 Rejected the Treaty establishing a Constitution for Europe
Netherlands 2005 61.5 Rejected the Treaty establishing a Constitution for Europe
Ireland 2008 53.2 Rejected the Treaty of Lisbon, before approving it in 2009
Switzerland 2014 50.3 Rejected free movement of labour
Denmark 2015 53.1 Rejected lifting Danish opt-out in justice areas
Netherlands 2016 61.1 Rejected the Ukraine-EU Association Agreement
0
5
10
15
20
25
30
35
40
45
50
Leave Remain Undecided
All (weighted sample) Only those "absolutely certain to vote"
M O R G A N S T A N L E Y R E S E A R C H
13
April 20, 2016
0
2
4
6
8
10
12
14
Generalelection, 2001
Generalelection, 2005
Generalelection, 2010
AVreferendum,
2011
Scotlandindependencereferendum,
2014
Generalelection, 2015
EUreferendum,
2016
% of 'don't knows'* in poll approximately 3 months before election/referendum
40 50 60 70 80 90
EEC referendum, 1975
General election, 1979
General election, 1983
General election, 1987
General election, 1992
General election, 1997
General election, 2001
General election, 2005
General election, 2010
AV referendum, 2011
Scotland independence referendum, 2014
General election, 2015
Turnout, %
2. Referendum: Sources of Uncertainty
Turnout
Is the status quo bias reliable?
Source: YouGov September 2014, YouGov April 2016, Morgan Stanley Research
Source: House of Commons, BBC
Number of undecideds is greater than in general elections. Higher if no ‘squeeze question’ asked
Source: YouGov, Morgan Stanley Research.
Has Cameron’s credibility been impaired?
Source: Ipsos Mori, Morgan Stanley Research * Ipsos Mori typically asks a 'squeeze question' in its general election polls and asked one in the EU referendum poll shown. Without these squeeze questions, the number of don't knows would be higher (e.g. 22% in the EU referendum poll cited which was for 22nd March)
-30
-20
-10
0
10
20
30
40
50
18-24 25-34 35-44 45-54 55-64 65+
Support for Union in Scottish independencereferendum
Support for Remain in EU referendum
-30
-25
-20
-15
-10
-5
0
5
10
15
2014 2014 2014 2014 2015 2015 2015 2015 2016
Cameron - net approval
M O R G A N S T A N L E Y R E S E A R C H
14
April 20, 2016
2. Referendum: Who is In and Who is Out
Print media have a Eurosceptical readership
Northern Ireland and Scotland are clearly pro-EU,
elsewhere quite close
Source: Source: Yougov/Times (January 2016), except RTE/BBC N Ireland for Northern Ireland (October 2015)
Source: Yougov, Audit Bureau of Circulation (January 2015). Morgan Stanley Research
Government, and many organisations starting to express a view
Source: Morgan Stanley Research. Graph shows average of four Yougov polls held between February 29 and March 4, following a change in methodology. Number shows net balance of opinion for Remain, excluding don’t knows.
0
500000
1000000
1500000
2000000
2500000
-40
-20
0
20
40
60
80
Gua
rdia
n
Inde
pend
ent
Tim
es
Mirr
or
Tel
egra
ph
Sun
Mai
l
Exp
ress
Circulation, RHS Remain
Leave Remain lead among readers
Line of neutrality
-20-10
0102030405060708090
No
rth
ern
Ire
lan
d
Sco
tla
nd
Lo
ndo
n
No
rth
Ea
st
Ea
st
Mid
land
s
Wa
les
No
rth
We
st
So
uth
Ea
st
So
uth
We
st
York
shir
e
We
st
Mid
land
s
Ea
st
An
glia
Remain Leave Net balance for Remain
• Government in favour of Remain
• CBI, TheCityUK are in favour of Remain. BCC are neutral.
• 35 FTSE-100 chief executives signed a letter in support of Remain.
• Some business leaders are in favour of Leave.
-20
-10
0
10
20
30
40
50
18
-24
ye
ar
old
s
ove
r 6
5 y
ea
r o
lds
Co
nse
rva
tive
Labour
AB
C1
C2
DE
Me
n
Wo
me
n
Balance of opinion for remain, excluding don't knows (pp)
Sharp Remain/Leave divisions by age, party and class
M O R G A N S T A N L E Y R E S E A R C H
15
April 20, 2016
3. Vote to Remain: Political and Economic Impact
Pay growth likely to rise, if growth recovers
Source: ONS, Morgan Stanley Research
Inflation Heading Back above Target – Triggering a
First Hike in Feb-17, we think
Source: ONS, BoE, Morgan Stanley Research
Source: ONS, Morgan Stanley Research
Limited Slack Left in Labour Market
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Apr-1992 Aug-1997 Dec-2002 Apr-2008 Aug-2013
U-rate, up to 6 months
U-rate, over 12 months
U-rate, 6-12 months
% Dotted lines are the average level of unemployment for each duration for the period 2Q 2000 to 2008.
0
1
2
3
4
5
6
97 99 01 03 05 07 09 11 13 15 17
Model Fcast of Private Sector AWE Growth%Y
Model projection using our forecasts for underlying inputs
-1
0
1
2
3
4
5
6
Jan-10 Jan-12 Jan-14 Jan-16CPI inflationRPI inflationBoE CPI inflation forecast (mode, market rate expectations)'Core' CPI inflation
f/cast
%Y
0%
10%
20%
30%
40%
50%
60%
70%
Remain Leave
Conservative voters
Conservative MPs
Conservative divisions over Europe could prove difficult to heal
Source: Average of five recent internet polls after the referendum date announced (ICM, 29th February and 6th March, Yougov, 1st, 2nd, 3rd March), whatukthinks.org, Conservative MPs from BBC, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
16
April 20, 2016
4. Vote to Leave: Political Impact
Background fragility: a slim parliamentary majority
Source: www.politicsresourcess.net, BBC, Morgan Stanley Research
0
10
20
30
40
50
60
1945 1951 1959 1966 1974 1979 1987 1997 2005 2015
Results in General Elections, % of Votes
Labour
Conservatives
Liberal Democrats
Challenger Parties
0
50
100
150
200
250
300
350
Cons Lab Lib Dems SNP Others
323 seats required for an effective majority
By-elections could erode the Conservatives' majority
of 12 by the end of the Parliament
Source: The Guardian, Morgan Stanley Research
0
1
2
3
4
5
6
7
8
9
Feb 74-Oct 74
1974-1979
1979-1983
1983-1987
1987-1992
1992-1997
1997-2001
2001-2005
2005-2010
2010-2015
Average resignations per year
Average deaths per year
Number of MPs
Source: Houses of Parliament
Fragmented politics: challenger parties doubled their
vote share to 25% in 2015
The political situation is already somewhat fragile, in
our view, since the incumbent government has a
narrow majority, voter support appears more volatile,
and policy divergence is higher.
In the immediate aftermath of a vote to Leave, the political situation is likely to move faster than the economic relationship with the EU.
There would be risks of:
1) an accelerated change in Prime Minister. This could delay or complicate exit negotiations, especially if the incoming government is more euro-sceptic.
2) another Scottish independence referendum.
M O R G A N S T A N L E Y R E S E A R C H
17
April 20, 2016
0%
5%
10%
15%
20%
25%
30%
35%
BorisJohnson
GeorgeOsborne
Theresa May Sajid Javid Michael Gove
All voters
Conservative voters
Question asked: Who is most likely to make you vote Conservative?
4. Vote to Leave: Political Risk (1) – Divided Government, Accelerated Succession
Cameron’s successor could be more Eurosceptic
Source: Average of five recent internet polls after the referendum date announced (ICM, 29th February and 6th March, Yougov, 1st, 2nd, 3rd March), whatukthinks.org, Conservative MPs from BBC, Morgan Stanley Research
Source: Ipsos Mori October 2015, Morgan Stanley Research
Widespread Euroscepticism among Tory MPs Boris goes for Out
Source: Open Europe October 2 2015, ConservativesforBritain.org, Morgan Stanley Research Source:Johnson, Daily Telegraph, 21 February 2016, Morgan Stanley Research
Conservatives are split over Europe
“There is only one way to get the change we need, and that is to vote to go, because all EU history shows that they only really listen to a population when it says No. The fundamental problem remains: that they have an ideal that we do not share. They want to create a truly federal union, e pluribus unum, when most British people do not.
It is time to seek a new relationship, in which we manage to extricate ourselves from most of the supranational elements. We will hear a lot in the coming weeks about the risks of this option; the risk to the economy, the risk to the City of London, and so on; and though those risks cannot be entirely dismissed, I think they are likely to be exaggerated.”…
“This is a once-in-a-lifetime chance to vote for real change in Britain’s relations with Europe. This is the only opportunity we will ever have to show that we care about self-rule. A vote to Remain will be taken in Brussels as a green light for more federalism, and for the erosion of democracy.”
Stance Cabinet Frontbench Backbench
Firmly In 0 6 8
In leaning 4 16 24
Swing voter 12 46 145
Out leaning 5 2 40
Firmly Out 0 0 22
Total 21 70 239
33 MPs were founding members or officials of Conservatives for Britain; 37 Tory MPs rebelled over the purdah rules on the EU referendum bill; 6 Ministers attending Cabinet (20%) and ~140 MPs (40%) are for Leave.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UKIP voters Conservativevoters
ConservativeMPs
Labour voters LiberalDemocrat
voters
Remain Leave
M O R G A N S T A N L E Y R E S E A R C H
18
April 20, 2016
4. Vote to Leave: Political Risk (2) – Scottish independence
Scotland’s First Minister (and SNP leader) Sturgeon
has laid down a marker
Source: Yougov, Morgan Stanley Research
Scotland appears materially more pro-European than
England
Scottish public opinion remains finely balanced
between supporters of the Union and supporters of
independence
Source: University of Edinburgh, Morgan Stanley Research Source: What Scotland Thinks. Morgan Stanley Research. Note: *Don't knows removed **In months where a number of polls occurred, we have attempted to equally space out the polls for presentational purposes
0
5
10
15
20
25
30
35
40
45
50
Leave the EU Stay in the EUand try to
reduce theEU's powers
Leave things asthey are
Stay in the EUand try to
increase theEU's powers
Work for theformation of a
singleEuropean
government
England Scotland
%
40%
42%
44%
46%
48%
50%
52%
54%
56%
Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15
How would you vote in the Scottish Independence Referendum If Held Now? **
Yes (= in favour of independence) No
SNP continues to dominate Scottish politics
10
15
20
25
30
35
40
45
50
55
GeneralElection,May 2010
ScottishParliament,May 5 2011
Yougov,Dec 9-11,
2014
Yougov,Mar 10-12,
2015
GeneralElection,May 2015
Yougov,October 13
2015
Yougov,February 4
2016
Labour SNP
“If you try to take Scotland out of the EU against our democratic wishes, you will be breaching the terms of last year’s vote…In those circumstances, you may well find that the demand for a second independence referendum is unstoppable.”
Nicola Sturgeon, SNP Conference, 15 October 2015
M O R G A N S T A N L E Y R E S E A R C H
19
April 20, 2016
5. Vote to Leave: Economic Impact – Opinion Divided?
Mix of economic views on the impact
Source: Morgan Stanley Research. For full notes relating to this chart, see ‘A Close Call’, November 2015
• Near-term impact would be lower investment (and consumption) given a protracted period of uncertainty as exit negotiations could take years.
• Economic sources of uncertainty include the wide range of economist estimates about the impact, and uncertainty about the eventual trading relationship with the EU. To some extent, different economic estimates can be boiled down to: Does the UK turn inward or outward?
• The costs of exit look more concrete and near term to us than the potential benefits.
CEP/LSE (pessimistic)
NIESR (Pain & Young)
Open Europe (pessimistic)
Mansfield (worst case)
CEP/LSE (optimistic)
US ITC
Mansfield (best case)
Open Europe (optimistic)
BISCBI
IOD/Leach IEA/MinfordCivitas/Milne
UKIP
-12
-10
-8
-6
-4
-2
0
2
4
6
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Net cost of EU membership/net gains from EU exit (see Appendix)
Date of study
Some Costs of EU Exit Some Benefits of EU Exit
1. Exit shock A. Greater stability
2. Protracted exit uncertainty B. Greater policy sovereignity
3. Reduced market access C. Reduced Trade diversion
4. Lower investment inflows D. Fiscal saving
5. Lower labour inflows E. Lower food prices
6. Financial sector shrinkage F. Reduced redtape
Different economists focus on different impacts
M O R G A N S T A N L E Y R E S E A R C H
20
April 20, 2016
5. Vote to Leave: Economic Impact: The UK’s Most Important Trading Relationship
EU important for UK exporters Europe – the largest destination for outbound FDI
Source: ONS, Morgan Stanley Research
0 10 20 30 40 50
EU28
EFTA
Russia
USA
Brazil
China
India
Japan
Saudi Arabia
South Korea
Other Gulf economies
Australasia/ Oceania
Africa
UK Exports Breakdown (2014), % of Total
Goods Services
Share of UK exports going to EU has declined over
time, but remains large
Source: ONS, Morgan Stanley Research Source: ONS, Morgan Stanley Research
Source: ONS, Morgan Stanley Research
Europe – the largest origin of inward FDI
12%
22%
32%
42%
52%
62%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
EU-28 Europe Americas Asia
0
10
20
30
40
50
60
70
Europe exEFTA
Europe exEFTA, Lux, NE
Americas Asia Other
UK Direct Investment Assets by region, %
2004 2014
0
10
20
30
40
50
60
Europe exEFTA
Europe exEFTA, Lux, NE
Americas Asia Other
UK Direct Investment Liabilities by region, %
2004 2014
M O R G A N S T A N L E Y R E S E A R C H
21
April 20, 2016
5. Vote to Leave: Economic Impact: “A Leap in the Dark?”, aka post-Brexit trading relationship with the EU
Spectrum of post-exit EU-UK trading arrangements
Source: Morgan Stanley Research
Sovereignty for market access: We see a complex tradeoff after a vote to Leave between the economics (which would tend to favour minimal change to current trading arrangements and maintain market access), and the politics (which is likely to be concerned with protecting UK sovereignty and reducing migration, even at the cost of market access, on the UK side, and, from the EU side, with avoiding a deal that might encourage others to follow the UK precedent. Financial stability/regulation concerns will likely also be important in EU decision on granting access for UK financial services firms. On balance we think the post-Brexit trading relationship with the EU is likely to be less favourable.
Market access and integration with the EU
Full participation in EU single
market
EU member
Almost full access to single
market
EEA member
Broad access to single marketBespoke relationship
Full access to single market in
goods Customs union
Broad access to single market in
goods Free trade deal
MFN/WTO access to the single
market
WTO relationship
Vote on EU rules? N N N N N Y
Bound by EU rules? N As agreed In some areas To a large extent Mostly Y
Free movement of labour? N N N Y Y Y
Financial contribution? N N N Some Some Y
Sharing of sovereignty
M O R G A N S T A N L E Y R E S E A R C H
22
April 20, 2016
5. Vote to Leave: Economic Impact: Will the Surplus Persuade the EU to be ‘Reasonable’?
… And many have limited trade exposure to the UK
Source: ONS, Morgan Stanley Research
UK’s external imbalance driven by the EU relationship
Source: ONS, Morgan Stanley Research
Source: IMF, Morgan Stanley
EU has a £104bn current account surplus (1.0% of
EU GDP) with the UK
6.6
0
2
4
6
8
10
12
14
16
18
Ire
land
Cyp
rus
Ne
therl
and
s
Be
lgiu
m
De
nm
ark
Ge
rma
ny
Sw
ede
n
Fra
nce
Sp
ain
EU
Ave
rag
e
Po
lan
d
Ma
lta
Po
rtu
ga
l
Fin
lan
d
Slo
va
kia
Ita
ly
Cze
ch
Re
pu
blic
La
tvia
Ro
man
ia
Hu
nga
ry
Lith
ua
nia
Gre
ece
Lu
xe
mbo
urg
Au
str
ia
Esto
nia
Bu
lga
ria
Slo
ve
nia
Cro
atia
Goods exports to UK, % total goods exports in 2014
But the deficit is concentrated with core EU…
-40000
-35000
-30000
-25000
-20000
-15000
-10000
-5000
0
5000
10000
-40000
-35000
-30000
-25000
-20000
-15000
-10000
-5000
0
5000
10000
GE
ES EU FR BE
IT NE
PO
LUX
AU
SC
ZP
OR
TSL
OG
RE
HU
NLI
THD
KLA
TC
YR
OM
FIN
SLO
CR
OES
TB
UL
SWE
MA
LIR
E
secondary income primary income
trade in services trade in goods
total
Source: ONS, Morgan Stanley Research. 2014 Pink Book data, in £ bn
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
1999 2000 2002 2003 2004 2006 2007 2009 2010 2011 2013 2014 2016
Current Account Balance, % of GDP
Non-EU
EU
Source: ONS, Morgan Stanley Research
-140000
-120000
-100000
-80000
-60000
-40000
-20000
0
20000
40000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Income
Services
Goods
Current account
Breakdown of UK's current account balance with the EU, GBP mlns
M O R G A N S T A N L E Y R E S E A R C H
23
April 20, 2016
5. Vote to Leave: Economic Impact: Exit process - uncertainties
Key uncertainties
Duration of major EU negotiations has tended to grow
Source: europa.eu for detail on the treaties, Universidad of Zaragoza for detail of negotiation timelines, Dinan, Origins and Evolution of the European Union for other dates. Morgan Stanley Research. Measured as months from launch of the intergovernmental conference to entry into force of the Treaty.
Source: Morgan Stanley Research
0 20 40 60 80 100
Treay of Rome (1958)
UK accession (1973)
Single European Act (1987)
Maastricht Treaty (1993)
Treaty of Amsterdam (1999)
Eastern enlargement (2002)
Treaty of Nice (2003)
Treaty of Lisbon (2009)
Period from formal start ofnegotiations to entry into force,months
“A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. … It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period. …the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it.”
Article 50, Lisbon Treaty – the exit process
For UK side:
1. When to notify the European Council and start the 2-year negotiation period
2. How rapidly to complete the negotiations
For EU side:
1. To what extent to cooperate (minimising disruption) or not (to reduce “unravelling” risk of Brexit being a precedent)
2. Whether to extend the negotiation period after 2 years
44%
12%
26%
18%
UK exports to EU
UK exports covered byexisting EU externaltrade agreements
UK exports which wouldbe covered EU externaltrade agreements inprocess
UK exports not coveredby current orprospective EU tradeagreements
82% of UK exports could face increased barriers
Source: UK government briefing on alternatives to EU membership. Data for 2014.
M O R G A N S T A N L E Y R E S E A R C H
24
April 20, 2016
5. Vote to Leave: Economic Impact: Negotiating Advantage with the EU?
WTO tariffs cap downside on goods exports
Source: WTO,Tariff Profiles 2014, Morgan Stanley Research. Most Favoured Nation (MFN) status is the trading relationship that applies to all WTO members when trading with another WTO member, and who have not agreed with each other another and more advantageous trade agreement, such as a customs union or free trade agreement.
Source: Eurostat, Morgan Stanley Research. For business services we have used 'Professional, Scientific & Technical Activities’ Source: ONS
Finance: The UK’s large financial and business
services sector might be at risk
0
5
10
15
20
da
iry p
rod
uct
s
su
ga
r &
co
nfe
ctio
na
ry
be
vera
ges &
to
bacco
an
ima
l pro
du
cts
ce
rea
ls a
nd
pre
pa
ratio
ns
fish
clo
thin
g
fru
it &
ve
ge
table
s
text
iles
co
ffe
e, te
a
oils
ee
ds,
fa
ts a
nd
oils
sim
ple
ave
rag
e
ch
em
ica
ls
oth
er
ag
ricu
ltu
ral p
rod
uct
s
Tra
nsp
ort
equ
ipm
en
t
leath
er
an
d fo
otw
ea
r
pe
tro
lue
m
Ele
ctr
ica
l machin
ery
Ma
nufa
ctu
res
min
era
ls
no
n-e
lect
rica
l m
ach
ine
ry
wo
od
52.8 29.7
0
5
10
15
20
25
Ne
the
rla
nd
s
UK
Be
lgiu
m
Ire
lan
d
Fra
nce
EU
Ge
rma
ny
Ita
ly
Sw
ed
en
Au
str
ia
Po
lan
d
Sp
ain
Business Services*, % of GDP
Finance & Insurance, % of GDP
UK specialised in services
Source: OECD
Transport
Travel
Construction
Insurance & pension services
Financial
Royalties etcOther business
services
Personal, cultural, recreation
-20
-10
0
10
20
30
40
50
0.0 0.5 1.0 1.5 2.0 2.5
Gro
wth
in
exp
ort
ma
rket,
OE
CD
, 2
00
8-2
01
3
Revealed UK comparative advantage
Size of bubble refers to size of market: OECD exports in that sector as % total OECD services exports
Relative export specialisation: UK's export market share versus OECD export market share. A value above 1 indicates that the UK is relatively specialised in the category
Size of bubble refers to size of market: OECD exports in that sector as % total OECD services exports
Relative export specialisation: UK's export market share versus OECD export market share. A value above 1 indicates that the UK is relatively specialised in the category
Telco/IT
Services a growing proportion of UK exports
20%
25%
30%
35%
40%
45%
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
UK goods exports to EU
UK services exports to EU
EU services exports as % of total EU exports
M O R G A N S T A N L E Y R E S E A R C H
25
April 20, 2016
5. Vote to Leave: Economic Impact: Longer Term, Reduced Inflows of Capital and Labour
Investment: UK the FDI leader in the EU
Source: OECD
Migration: We would assume lower labour inflows
Source: ONS, 2011 Census.’ Source: ONS
0
200
400
600
800
1000
1200
1400
1600
UK Germany France Italy Spain Netherlands
Inward FDI Stock, 2012
1992 2002 2012
$bn
Investment: But only recently became the top FDI hub
Source: OECD
-800
-600
-400
-200
0
200
400
600
800
1,000
-800
-600
-400
-200
0
200
400
600
800
1,000
1Q1998
1Q2000
1Q2002
1Q2004
1Q2006
1Q2008
1Q2010
1Q2012
1Q2014
1Q2016
UK born EU born
Non-EU born Total
May 2004 EU enlargement
'000's, changes in employment
70% 80% 90% 100%
Administrative and secretarial…
Skilled trades occupations
Sales and customer service occupations
Associate professional & technical…
Managers, directors and senior officials
Caring, leisure and other service…
All categories: Occupation
Process, plant and machine operatives
Professional occupations
Elementary occupations
UK born EU-born
non-EU-born
Migration: Migrants averaged 15% of employees,
ranging from 11-22% in 2011 census
0%
5%
10%
15%
20%
25%
0
200
400
600
800
1000
1200
1400
1600
1800
2000
UK Germany France Netherlands Spain Italy
2014 Net Inward Investment, ex SPEs % of EU total
M O R G A N S T A N L E Y R E S E A R C H
26
April 20, 2016
-0.10%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
-1000
1000
3000
5000
7000
9000
11000
13000
15000
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15e
20
17e
20
19e
UK net contribution to EU, £mn
UK net contribution to EU, % of GDP (rhs)
Average (1973-2014), rhs
0.00% 0.10% 0.20% 0.30% 0.40% 0.50%
UK average net contribution,1973-2014
Estimated UK average netcontribution, 2014-2020
Estimated Norwegian netcontribution
Estimated Swiss net contribution
5. Vote to Leave: Economic Impact: Some Benefits of Exit
UK net contribution to EU has averaged 0.3% of GDP
since the UK joined the EU in 1973
The UK is the second-largest net contributor to the
EU budget
-12000
-7000
-2000
3000
8000
13000
DE
UK
FR IT NL
SE
DK
AT FI
CY
CR
MT IE SI
EE
LV
BG
LU
SK
LT
BE
RO
CZ
ES PT
HU
GR
PO
EUR mlns
But UK may still pay contributions if it exits the EU.
Estimated UK, Swiss and Norwegian net contributions to
the EU, % of GDP
Source: Source: OECD Agricultural Support Data. Consumer Support Estimate is an estimate of the transfer to farmers (producers) from consumers. Morgan Stanley Research
Source: Estimated by Morgan Stanley research based on data provided by Norwegian mission to the EU, by the Swiss paper Tagesanzeiger HMT, EU, Morgan Stanley Research
Source: Data is average net contribution by member state 2011-2013, European Commission, Morgan Stanley Research
Lower food prices – but CAP reform has materially
reduced the EU food price “gap” to market prices
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
-80
-70
-60
-50
-40
-30
-20
-10
0
1986 1991 1996 2001 2006 2011
Consumer Support Estimate, bn euro
Consumer Support Estimate, % offarm gate price which is a transferfrom consumers
Source: ONS, OBR (GDP forecasts), House of Commons briefing paper 06455, 31 July 2015, EU budget 2014-2020 for past and forecast EU budget contributions
M O R G A N S T A N L E Y R E S E A R C H
27
April 20, 2016
0.0
0.5
1.0
1.5
2.0
2.5
3.0
US Canada UK Japan France Germany Italy
Protection of permanent workers against individual and collective dismissals
Scale, 0 (low) - 6 (high)
5. Vote to Leave: Economic Impact: Limited Scope for Gains from Deregulation
Relative UK performance has improved since the
1973 accession
Moving up the ease of doing business rankings
Source: Statistisches Bundesamt, INSEE, ONS, Datastream, Haver Analytics, Morgan Stanley Research Source: OECD Employment Protection Legislation
0
1
2
3
4
5
6
UK Germany France
Average GDP gowth, %
Before the UKjoined (1958-1972)
After the UK joined(1973-2014)
UK has “some of the most flexible labour markets in
the G7” according to Governor Carney
Low levels of product market regulation
* US data relate to 2008, all others 2013. Source: OECD (2013), Product Market Regulation Database Source: World Bank, Ease of Doing Business
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
UK US Italy Germany Japan Canada France
Product market regulation*
Scale, 0 (low) - 6 (high)
2016 2015 2014
1 Singapore Singapore Singapore
2 NZ NZ NZ
3 Denmark HK HK
4 South Korea Denmark Denmark
5 HK South Korea South Korea
6 UK Norway Norway
7 USA USA USA
8 Sweden UK Finland
9 Norway Finland UK
10 Finland Australia Australia
M O R G A N S T A N L E Y R E S E A R C H
28
April 20, 2016
5. Vote to Leave: Cumulative Economic Impact
Source: Morgan Stanley Research
Mapping the Referendum Scenarios - sequence of events and economic impact
Initial Negotiations
Campaign Volatility
Referendum shock
Protracted Uncertainty
New Equilibrium: Slower - but More Stable?
Modest impact,
mainly though
a drag on
investment
UK economy
continues to do
well
Referendum approaches, outcome unclear: • Broad impact on
asset prices, confidence & investment
• Volatility rises with risk of an 'Out' vote
The day after a vote to exit: • Profound uncertainty
& market sell-off • Hit to confidence &
investment • Official reaction,
including halting rate rises
After actual exit:
• Political & economic uncertainty lasting several years
• Initially, monetary policy likely to stay on hold and fiscal policy to ease
Reduced inflows of
labour and capital slow
growth
Reduced exposure to
external factors
But lower labour
supply may mean
faster rate hikes
BULLBASE
BEAR
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6. Overview: UK Scenarios
Base, ‘medium stress’ and 'high stress’ scenarios
• In our base case (60% probability), there is a close
contest – leading to substantial uncertainty, a
growth slowdown and higher financial market
volatility – but ultimately a vote to remain, triggering
a relief rally and subsequent growth pick-up:
GDP growth: 1.7% (2016); 2.3% (2017)
Inflation: 0.7% (2016); 1.7% (2017)
Monetary policy: 0.5% (end-2016); 1.00 (end-
2017)
• In our Leave base case, the UK votes to Leave
the EU, there is a further reaction in markets and
uncertainty is higher. Resilience of domestic
demand just keeps the UK out of recession:
GDP: Cumulative hit of 1.5pp spread over 2016
and 2017 (compared to a no referendum scenario)
Inflation: Pushed above target by a weaker GBP
Monetary policy: On hold over our forecast
horizon, but with a higher risk of easing.
• In our Leave bear case, the effects of a vote to
Leave are compounded by worse feedback effects
in the rest of Europe and an additional shock to
financial conditions:
GDP: Cumulative hit to GDP over our forecast
horizon of a bit more than 2.5pp.
0%
1%
2%
3%
2015 2016 2017
Remain
Leave - base case
Leave - bear case
Real GDP growth, %
Estimate of medium-term potential growth
The fork in the road
Source: ONS, Morgan Stanley research estimates
Our assumption is that, at least for a while, potential growth in the UK would move closer to 1.5% a year from a little above 2% currently:
• Trade: We expect that after Brexit, the UK would have a significantly worse level of access to EU markets.
• Investment: Weaker investment would have a lingering effect on the capital stock and could damage productivity growth.
• Migration: We assume a vote to Leave would lead to a tightening of immigration controls.
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6. Overview: Impact of Brexit on the rest of Europe
-2.0
-1.6
-1.2
-0.8
-0.4
0.0
2016 2017 2016 2017
Impact of Brexit on GDP Growth Dev. from Base (pp)
Eurozone CEE UK
High Stress Scenario Medium Stress Scenario
Sizeable Negative Effects in Brexit Scenarios
Country RankNot Feeling an EU
Citizen
Gov't Debt Held by Non-
Residents
Trading with Non-EU
Countries
Net Payments to Other
EU CountriesEurosceptic Parties Schengen Membership Euro Membership
Greece 1 4 1 1 22 2 Yes Yes
United Kingdom 2 5 25 2 10 5 No No
Cyprus 3 2.5 9 16 15 7 No Yes
Austria 4 8 4 22 5 10 Yes Yes
France 5 6 14 13 7 9 Yes Yes
Netherlands 6 10 18 9 1 13 Yes Yes
Italy 7 2.5 23 3 9 14 Yes Yes
Finland 8 21 2 11 4 17 Yes Yes
Sweden 9 16 19 12 2 11 Yes No
Germany 10 19 10 8 3 24 Yes Yes
Belgium 11 16 16 17 6 12 Yes Yes
Latvia 12 11 3 23 25 6 Yes Yes
Ireland 13 23.5 11 5 11 19 No Yes
Bulgaria 14 1 17 10 27 18 No No
Poland 15 14 13 20 24 3 Yes No
Spain 16 21 20 7 12 16 Yes Yes
Czech Republic 17 5 24 26 18 8 Yes No
Hungary 18 12.5 15 25 28 1 Yes No
Portugal 19 16 7 19 17 22 Yes Yes
Denmark 20 23.5 21 15 8 15 Yes No
Malta 21 27 27 4 20 4 Yes Yes
Lithuania 22 25 5 6 26 23 Yes Yes
Croatia 23 9 22 14 14 28 No No
Slovakia 24 13.5 12 27 16 20 Yes Yes
Slovenia 25 21 6 18 19 26 Yes Yes
Romania 26 7 26 21 23 21 No No
Estonia 27 18 8 24 21 25 Yes Yes
Luxembourg 28 27 28 28 13 27 Yes Yes
EU Exit Risk Monitor
Source: European Commission Eurobarometer 84, Autumn 2015, QD2.1 (Not Feeling an EU Citizen); Eurostat, HM Treasury and Danmarks Nationalbank (Government Debt Held by Non-Residents), Eurostat (Trading with Non-EU Countries), European Commission (Net Payments to Other Countries), Morgan Stanley Research (Eurosceptic parties)
Source: Morgan Stanley Research estimates
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
Impact of 'Medium Stress' Brexit on the Eurozone:Deviation from Baseline & Contributions (pp)
Weaker trade growth Higher labour force
Lower productivity Tighter fin. Cond.
Overall impact
Unemployment Rate (inverted)GDP Growth
Source: Morgan Stanley Research estimates
Our European economics team think that the likelihood of any other country exiting the EU following Brexit is very unlikely, but the market may see contagion risk
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