Brexit could drag the UK into recession, warns Aviva Investors

Brexit EU referendum vote ballotThe UK economy is likely to dip into a recession if the country decides to leave the European Union, Aviva Investors’ chief executive Euan Munro has warned.

“We believe there would be a significant and negative knock-on effect on business sentiment, which would likely push the UK economy into recession towards the end of this year,” says Munro, talking about the asset manager’s house view.

He says the consequences of a “no” vote “wouldn’t just be felt temporarily” but this will lead to “a permanent reduction” in exports to the EU. Currently 50 per cent of the UK’s exports go to EU countries, representing around 15 per cent of GDP, he says.

He adds that foreign-direct investment into the UK would suffer, and, as a result, unemployment will rise and the long-term growth potential for the country will decline.

Munro adds that the drop in foreign-direct investment could “shave 0.2 to 0.4 percentage points off growth”, although admits any estimates are speculative.

Munro says: “We think that should the UK vote for Brexit, the impact of increased uncertainty on business sentiment and the negative impact on sterling assets would be large enough to send the economy into recession in 2016.”

The chief executive warns that businesses will delay and possibly abandon planned investments altogether in a Brexit scenario.

He says: “In the global financial crisis, the decline in business investment in the UK subtracted two per cent from GDP.

“While we would not expect as large a decline as that, we see it as entirely plausible that a fall in business investment could be enough to push the UK into recession by late 2016.”

Looking to the stock market, Munro adds that smaller companies are likely to be hit hardest, as they are most reliant on the domestic economy.

“While the Bank of England would no doubt ease policy in response to any economic downturn, it seems unlikely this would prevent UK share prices from falling sharply,” he says. “In particular, shares in smaller companies, which tend to rely more on the domestic economy, would probably underperform.”

Speaking to Fund Strategy last month, JP Morgan chief market strategist Stephanie Flanders said that the biggest impact of Brexit will be seen in the small cap space.

She said: “I am less concerned about big market moves [in the event of Brexit] and the sterling than I am about in the individual companies that we are invested in. We especially worry on how skilled we think they are in navigating that new environment.”