Brexit would damage UK economy, warns BlackRock

The world’s largest fund manager, BlackRock, has warned that a Brexit vote would damage Britain’s economy by leading to lower growth and investment, and possibly higher unemployment and inflation.

In a gloomy analysis, the US asset manager said a decision to leave the EU would also hit the pound and UK equities, as well as damaging Britain’s financial industry, the London property market and the fashion industry.

BlackRock’s wide-ranging warning is a sign of the growing unease among investors about the Brexit debate. A number of leading business figures have spoken in favour of the UK remaining in the EU. This week, the Cabinet Office warned of 10 years of uncertainty in the government’s first official analysis of how Brexit would unfold in practice. But the out campaign, backed by the London mayor, Boris Johnson, likened such extreme warnings to those made when Britain considered joining the euro.

BlackRock’s vice-chairman, Philipp Hildebrand, said: “Our bottom line is that a Brexit offers a lot of risk with little obvious reward. We see an EU exit leading to lower UK growth and investment, and potentially higher unemployment and inflation. Any offsetting benefits look more amorphous and less certain, in our view.”

The report said sterling was most vulnerable to Brexit fears. “A Brexit could pressure the UK’s budget and current account deficits, hurting the currency and potentially triggering credit downgrades. Conversely, we see depressed sterling bouncing back if the UK votes to stay.”

It predicted rising volatility in UK and European assets in the run-up to the referendum in June, and a sell-off in domestically focused UK equities in the event of a Brexit vote. A decision to leave the EU would also hurt the UK’s fashion trade, deals for the key services sector, and damage London’s property market, in particular demand for office space.

Turning to the City, the report argued: “A Brexit would cut into the financial industry’s outsized contributions to the UK economy, tax revenues and trade balance, we believe, and offset apparent fiscal gains from leaving the EU.”

The UK’s surplus in financial, insurance and pension services of £18.5bn was likely to shrink, BlackRock added. The City is also a key source of Britain’s tax revenues, and if 10% of workers lost their jobs after a Brexit, the government could lose up to £3bn in annual employment taxes and, to a lesser extent, for the rest of the EU. No country has ever left the union, and Brexit talks could drag on for several years. Senior figures from the out campaign were likely to demand leading roles in the exit negotiations, which could make the process “unpredictable and destabilising”.

A Brexit could also encourage the Scottish National party to call for another independence referendum, although the oil price slump has undermined the case for an independent Scotland.

Even a yes vote might not be enough to ward off political turmoil. The report argued that a tight result, or a feeling by out campaigners that it had not been a fair fight, could put further pressure on David Cameron’s small parliamentary majority and authority over his divided party. This could make it more difficult to pass controversial legislation in future.

There would be a negative impact on the EU as well. The report said: “The EU, for its part, would lose a major budget contributor, a leading voice for free markets and easy access to a world-class financial centre. A Brexit could spur separatist calls and embolden populist parties across the continent, but we do not see a EU breakup as a result.”

One of the report’s authors is BlackRock’s chief macro strategist, Rupert Harrison, a former chief of staff to the chancellor, George Osborne.