UK GDP could drop 1.0% in 2017 under Brexit scenario, Credit Suisse says

Financial and betting markets were pricing in a high probability of a “Remain” vote but the outcome was still “highly uncertain”, Credit Suisse cautioned clients.

Indeed, a “leave” vote might push the broker’s measure of risk appetite into “panic”, Credit Suisse said.

“The correlation between betting market odds and global risk appetite has been extraordinarily high in the past few weeks. That suggests an immediate, large and highly correlated move in both safe and risk assets once the outcome is clear,” analysts Anais Boussie, Peter Foley, Neville Hill, Sonali Punhani and Giovanni Zanni said in a research note sent to clients.

In case of ‘Leave’ coming out on top, the broker forecast a “shallow” recession unfolding in the UK, together with a slowdown in the euro area and easing measures from the Bank of England and European Central Bank.

Just how much would UK gross domestic product shrink if the country left the EU? Credit Suisse estimated a fall of 1.0% between the third quarter of 2016 and the first quarter of 2017.

GDP would drop by around 1.0% in 2017 instead of growing 2.3%, with the latter being their current projection under a ‘Remain’ scenario.

To watch out for on Friday was the margin of a potential ‘Leave victory’, the analysts said, as it might be proportionate to the speed with which Britain would move towards an ‘exit’.

Whether the Prime Minister invoked Article 50 of the EU Treaty – the exit clause – on Friday (which was unlikely) was the other key event to watch for.

Once triggered, it would become extremely likely that the UK would leave, Credit Suisse said.

Political “turbulence” in the UK in the aftermath of an exit was likely to be “high”, with markets also increasingly focusing on mounting political stresses in Southern Europe, the broker said.

A victory for ‘Remain’, on the other hand, should see the British economy recover momentum after a weak first half of the year, alongside some residual political volatility.

Under such a scenario, economic activity in the euro area would continue its domestic-demand-driven expansion, with the BoE and ECB on hold for the rest of 2016.