Economic trends

Brexit: ‘remain’ campaign is losing momentum

The polls are inconclusive, but it’s clear the ‘remain’ campaign has lost its major lead

With a high number of UK voters still undecided about whether to vote ‘remain’ or ‘leave’ in the June referendum on the European Union (EU), upcoming events could swing support one way or another.

Despite the full force of the government machine and a major lead a year ago, the ‘remain’ campaign has lost momentum, according to opinion polls. These suggest that warnings about the economic consequences of leaving the EU have failed to persuade voters to opt for staying.

Most polls do not filter for turnout, which can have a substantial impact on the outcome

Two recent phone polls, taken after a recent pro-remain analysis by the Treasury and pro-EU comments from President Obama, show ‘remain’ in the lead, but with a narrower gap over ‘leave’. This is despite an increase in the share of respondents believing that the UK would be worse off if it left the EU. Five out of eight of the most recent online polls show ‘leave’ in the lead, however, one showing a 50/50 split is biased towards ‘leave’ when taking into account how likely it is that respondents will vote.

Brexit: ‘remain’ campaign is losing momentum Fig. 1

That said, there are ongoing concerns about the reliability of the opinion polls. Most polls do not filter for turnout, which can have a substantial impact on the outcome. Also, analysing data from the last 25 referendums held in Ireland suggests that early polls may be very unreliable. Only in the last month, and in particular the last week before the event, does polling error plummet and predictive accuracy improve.

What will affect the final outcome?

As the Brexit vote on 23 June approaches, campaign effectiveness will depend on a number of factors, including: official campaign funding; social media penetration; campaigners on the ground/regional networks; senior political support; support from non-governmental organisations (NGOs), trade unions and business; and migration figures.

Brexit: ‘remain’ campaign is losing momentum Fig. 2

Importantly, in the last 28 days before the vote, central and local government are prohibited from publishing material relating to the referendum, although ministers may campaign in a personal capacity. This means the ‘remain’ campaign will lose a vital backer.

How would a Brexit affect the pound?

For the British pound, Brexit implications will be played out through foreign investment. The UK’s large current account deficit makes the pound vulnerable, but so far resilient foreign direct investment (FDI) and debt investment have funded the shortfall. However, a vote to leave the EU could undermine these inflows.

Brexit uncertainty is already resulting in reduced foreign investment. The six-month moving average of debt portfolio, equity portfolio and FDI flows into the UK fell in the third quarter of 2015, the latest for which data is available. Mergers and acquisition (M&A) announcements – a more up-to-date measure of foreign investment in the UK – show that the value of deals announced between UK sellers and foreign buyers fell sharply in December 2015, and have remained at depressed levels since.

In our view, the British pound remains vulnerable if the UK votes to leave the EU. Taking the pound’s exit from the Exchange Rate Mechanism (ERM) as a template, a ‘leave’ vote could see EUR-GBP exchange rate move above 0.84 and GBP-USD exchange rate fall to 1.23.

 

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