The euro will meet its nemesis in 2017 as the ECB’s cheap money runs dry

 

 

 

 

 

 

 

 

 

 

One of the burning questions that will vex global investors in 2017 is whether the euro will still be in existence by the end of the year. That may seem a bit of a shocker to think of as the euro enjoys a spell of short squeeze. But, without a doubt, the single currency looks set to have an extremely rough ride this year.

A dangerous cocktail of negative factors will prove its undoing this year. Weak economics, dodgy money, bad budgets and ugly politics will all have it in for the euro. Euro zone policymakers will be pushed to the limit to stop the currency going over the edge of a precipice.

The euro has a precariously weak footing right now, perilously poised above parity against the US dollar, leaving a plunge below EURUSD 1.0 a high probability in future months. It is not just the dollar on a rampage, but the realisation among global investors that the single currency has been skating on thin ice for far too long and cracks continue to spread at an alarming rate.

Weak economics remain at the root of the currency’s vulnerability. Germany may be showing some better glimmers of life going into 2017, but, outside, most of the euro zone is a zombie economy, kept alive by a surfeit of cheap and easy money from the European Central Bank’s super-stimulus programme. It’s not going to last forever.

There is no plan to cut back the ECB’s asset-purchase programme just yet, but clearly there are already discussions going on in Frankfurt backrooms to kill QE at some stage. Germany is at the front of the queue calling time on the ECB’s unprecedented monetisation and the clamour for policy normalisation will intensify, not least because euro zone inflation is staging a comeback.

The ECB’s favoured inflation indicator, the 5-year, 5-year break-even forward rate, is already back up to 1.76 per cent after touching a 1.3 per cent low last year. This will be setting off ECB alarm bells, especially as the demand for credit has accelerated very sharply in the last two years. Worries about asset bubbles forming will only harden Germany’s resolve to stop the monetary overkill as soon as possible.

Once QE’s taps are turned off, that’s when the trouble starts. The ECB has extended asset purchases until December 2017, but tensions will surface long before then. Short term interest rates and longer-dated bond yields will start to rise in anticipation of the ECB’s ‘taper tantrum’. Germany’s economy may be better-placed to deal with higher borrowing costs, but the weaker euro zone economies will be left in the lurch.

With the ECB’s cheap money crutch kicked away, consumers, businesses and investors in the more vulnerable euro zone economies will start to feel the pinch. Unemployment rates in Italy, Spain, Portugal and Greece are still too high and economic confidence levels still too low to warrant any extension of spontaneous recovery.

Without the ECB’s monetary pump, these economies will be in trouble again pretty quickly. With burgeoning budget deficits and groaning government debt piles – 183 per cent in the case of Greece – there is nothing left to reflate recovery, unless it comes from Germany re-cycling its fiscal surplus. And the odds of that happening are about as high as hell freezing over.

It is no surprise European public opinion is splintering and euro scepticism and political populism are on the rise. Britain’s Brexit vote last June opened up a gaping wound in the EU’s formerly cohesive political centralism, leaving EMU and the euro in dire danger as Europe runs the gauntlet of key elections in Germany and France in 2017.

The benchmark test is most likely to come in France, especially if the political fulcrum tips towards the far-right and the risk of a future referendum on continued euro membership. Without France, it would be the end of the road for EMU, the euro zone and the euro – quite possible even the EU. The euro bears would have a field day. The old 0.8225 euro-dollar low would be blown away very quickly.

Chaos would ensue. Divergence trades would go ballistic, there would be a major flight out of global risk assets and safe haven demand would go through the roof. In short, global investors would be praying for the return of the old German mark for salvation.

2017 will mark a perilous time for global investors as the euro finally meets its nemesis.

 

 

Don't rule out a Fed surprise this week

It is time for the Fed to stop muddying the waters and come clean on its true monetary policy intentions. Another interest rate tightening is long overdue and no better time to get Fed policy back in traction again with an unequivocal rate hike signal this week. The market expects it, the US economy needs it and it could do the Fed’s policy credibility a world of good. A surprise rate rise would not go amiss this week.

The Fed has skirted round the issue of higher rates for far too long and for a myriad of reasons. Weakness in the global economy, the risk of a hard landing in China, turbulent financial markets, Brexit fall-out worries and domestic uncertainties have all provided good excuses for the Fed to sit on its hands since last December’s inaugural US interest rate rise.

The longer the Fed has delayed grasping the monetary mettle, the more it has risked its own credibility. It has vacillated far too long, it needs to set November’s US Presidential elections to one side and start thinking about domestic considerations. The US is approaching full employment, the economy is expanding at a comfortable pace and domestic inflation pressures are starting to stir. The Fed would be rash to leave raising rates too much longer.

Last week’s US inflation data definitely leaves the Fed something to rue over. August consumer prices rose more than expected, rising 0.2 per cent, with the cost-of-living index pushed up by surging healthcare and housing costs. This bumped up the headline inflation rate to 1.1 per cent, with core prices gaining 2.3 per cent over the last 12 months.

US deflation risks are a thing of the past, so now the Fed must start thinking about the build-up of future inflation pressures, especially with the economy on a sound footing and the monetary accelerator still being pressed hard to the floor. It may seem remote right now, but the Fed has a duty of care to avoid overheating risks down the line. US interest rates set just above zero seem out of line with the US jobless rate running close to a 10-year low.

It would be preferable to get this second rate hike out of the way as soon as possible and no better time than this week, well ahead of November’s Presidential elections. But the market is ill-prepared for a move so soon thanks to the Fed’s mixed messages. Right now, market polls suggest the probability of an imminent hike is more like 70 per cent in favour of a December move, once the elections are over and the Fed can avoid accusations of political bias.

What should be expected this week is the likelihood of a ‘hawkish hold’, putting the markets on amber alert for higher rates just as soon as November’s election is out of the way. A more aggressive Fed bias should be a shot in the arm for investors expecting the US dollar to push higher again. The dollar’s long term rally has been stranded for far too long and a break-out is well-overdue.

Certainly from a fundamental perspective, the US dollar should have a lot more going for it than the other major currencies, based on relative interest rates, bond yields and growth expectations. It just needs the right trigger to set the trend back in motion again. A Fed signalling unambiguous rate tightening intentions should be enough to set the ball rolling again.

While the Fed is opening the door to higher rates, the European Central Bank, the Bank of Japan and the Bank of England are all giving the nod to lower rates ahead. Relative yield spreads are already working in the dollar’s favour with 10-year US government debt yielding around 170 basis points over equivalent bonds in the euro zone and Japan and about 80 basis points over the UK. Meanwhile US GDP growth running around 2 per cent continues to be dollar-positive relative to lacklustre economic expansions in Europe and Japan.

The key for the Fed is maintaining a ‘Goldilocks’ tightening bias over the coming months. Hinting at ‘not too much’ and ‘not too little’ rate tightening is the right approach for a central bank committed to getting its monetary credibility back on track again.

At some stage the Fed will need to get official interest rates back into a ‘normalised’ range of between 2 and 4 per cent in the next few years, for US monetary policy to reign supreme again.

Britain needs more than a sledgehammer to crack any post-Brexit recession nut

Crisis, what crisis? Just over a month after Britain’s landmark Brexit vote there is an uncanny sense of calm in the air. UK equity markets have regained some relative poise, the pound has stabilised after a fearful fall and overseas capital still seems to be flowing into the economy. The UK even managed a 0.6 per cent GDP rise in the second quarter. Some optimists are saying it is all a vote of confidence in Britain PLC. So what is all the fuss about?

But the latest snapshots show clear-cut cracks starting to appear in the economy. Post-Brexit business confidence is showing sharp falls, consumer confidence is looking rattled and UK construction surveys are looking extremely weak. It is not surprising that forecasters are buzzing with speculation about a UK plunge into recession later this year. Third quarter GDP might have slipped by as much as a half per cent with the economy sliding into recession by the end of the year.

We should know a lot more this Thursday, when the Bank of England gives its latest assessment of UK economic prospects and there is a very strong chance of a 0.25 per cent interest rate cut. The Bank has already made strong hints that the economy needs a summer stimulus after the Brexit shock. Chief Economist Andy Haldane even suggests the risks of a prolonged UK downturn are high enough to warrant overkill measures, using a sledgehammer approach to crack a nut.

The UK economy needs less of a sledgehammer and more of a multi-tool piledriver to bolster the economy right now. The BOE’s likely response of negative interest rates, more QE and extra liquidity provisions over the future are bound to be a positive development, but they must be augmented by fiscal reflation and a much more proactive industrial strategy over the future.

On the positive side, the UK government has already made the break with former Chancellor George Osborne’s ‘balanced budget’ dogma and seems inclined towards a more supportive fiscal stance in future. But, with Britain’s balance of payments falling deeper into the red, the government needs a quick re-think about closing the yawning current account deficit, currently running at 7 per cent of GDP. This is much bigger than the 4 per cent deficit at the time of the 1976 sterling crisis when the UK was forced to go cap in hand to the IMF for a sovereign bail-out.

The weaker pound will help boost UK exports in the long run, but it is a risky strategy with very limited duration. The economy needs sustainable solutions longer term, which will return the UK’s external deficit back to the black. In the meantime, the UK could be sailing very close to the wind on another sterling crisis before too long, especially if international investors give the thumbs down to inward investment and growing impatience turns to outright capital flight.

Recent investor surveys make grim reading. Reuters’ monthly survey of UK-based funds conducted July 15-27 in the aftermath of the June 23 referendum shows some dramatic shifts in investor confidence. UK investors slashed their equity holdings in July to the lowest level in five years and halved the share of property holdings in their portfolios. London’s over-cooked property market, used by many overseas investors as a land bank, could be in for a deep shock.

With uncertainty on the rise, UK asset managers have bolted into safe haven investments, raising their allocations in UK government bonds to the highest level in almost five years. If international investors give a similar vote of no confidence to UK financial markets then the pound could be in deep trouble. In the absence of a credible post-Brexit action plan, laissez-faire, free market remedies will leave the UK economy perilously exposed.

The plunge in the pound leaves strategic UK industries dangerously at risk of a yard sale. The government might think the recent sale of Britain’s leading chip maker ARM to Japan’s SoftBank is a positive step forward, but it leaves a huge hole in Britain’s domestic ability to compete in hi-tech global markets over the future. In the same vein, the proposed sell-off (or closure) of Britain’s vital steel industry should not be left to chance. The pound’s fall to its lowest level in real terms since 1985 puts British industry in bargain basement territory. UK companies are becoming Poundland special offers.

International investors will be watching the UK’s policy response very carefully in the coming months. If it is all left to the Bank of England’s monetary sledgehammer and more currency debasing, then the markets will have every right to mark the pound down.

Sterling is not out of the woods yet and is probably heading into deeper trouble before long. If there is a rush to the exits on sterling assets, the pound could be staring into the jaws of parity trades against both the euro and the US dollar over the medium term.

Thanks to Brexit, a new global financial crash is looming

It is no exaggeration to say that the world economy has just entered into a new age of deep uncertainty. Britain’s decision to quit Europe has sent profound shockwaves around the world at a very bad moment. The world economy is hardly out of one global financial crisis and the odds are surging that another worldwide crash is about to begin.

Britain’s Brexit vote has far-reaching consequences with the potential to throw the world into even bigger economic chaos and disorder than the 2008 global financial crisis. The catastrophic collapse in the UK pound, free-falling global equities and a dramatic surge in market volatility is just the start of it. The lid has been lifted off Pandora’s Box of morbid fear. There is no end to the list of deep concerns in investors’ minds, bringing risk aversion and market panic to boiling point.

Global financial confidence is a fragile house of cards at the moment. Global policymakers have worked courageously and been extremely inventive to keep the forces of global contagion at bay over the last seven years. Zero interest rates, creative monetary engineering and lashings of QE cash have held the line, but there is precious little left in the central banks’ kitty to deal with what may come next. The next crisis could be the one that breaks the central banks.

What complicates matters is that the world is already consumed with fear and loathing about unsustainable global debt levels, the parlous state of global banking, the spectre of a hard landing in China and growing geo-political concerns. Meanwhile, supranational bodies like the United Nations, World Bank, International Monetary Fund, OECD and Group of Seven seem increasingly powerless to make any difference.

Worries about the health of the flagging global economy are genuine. Increased uncertainty will hit economic confidence hard. Consumers will hold back on spending, companies will suspend output and investment intentions and global trade will slow down even more. More vulnerable parts of the world economy will risk slipping back into recession and deflation will continue to get the upper hand.

Major central banks will come under growing pressure to intervene with even more negative interest rates and extra QE provisions. Governments will be forced to end fiscal austerity and open up deficit spending again. Some governments will be tempted down the road of competitive currency devaluations. The world will heading deeper into a bizarre world of increasingly ineffectual and more dangerous policy remedies.

Increasingly alarmed investors will be looking for scapegoats, so it is no surprise the contagion spilling out from Britain is already subsuming European equity markets, peripheral bond and credit spreads and critically hitting the euro hard. Calls for similar EU referendums in France, Italy, Netherlands and Denmark have horrified the markets. Any escalation of the euro crisis could be the beginning of the end for European monetary union.

The risk of other countries leaving the EU or the euro zone is the stuff of nightmares. The European Central Bank is loaded to the gunnels with ‘derivative’ QE assets. Any risk of the ECB partnership untangling and the ensuing threat to the euro and global markets would be unimaginably toxic. A sub-parity euro/dollar fx rate is a strong possibility.

With the initial shock out of the way, the markets are bound to find some level of temporary support in the short term. The likelihood is that any correction will only be a bear market bounce and selling will persist into the longer term. The challenge is what will stop deeper rot from setting in. Central banks in disarray, global economic growth slowing and world trade contracting are all good reasons to dump risk assets at the first opportunity.

Short of running for the hills and joining survivalist movements, investors still have some options. Safe haven trades into high grade German and US government debt should help protect investor capital. On the currency side, Japanese investors have already flooded back into yen, but the US dollar and Swiss franc should also be priority buys for most investors. So too will be the age-old sanctuary of gold. Stocks, credit, emerging markets and commodity currencies like the Canadian and Australian dollars will be given a wide berth.

Right now, the market is in a state of flux and investors should be prepared for the worst. Market soothsayers are bound to dust off the worst of the Doomsday scenarios and the odds are in their favour. The clock is ticking and investors should be prepared for a new crash.

Europe is in deep trouble whichever way Brexit vote turns out

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whichever way Brexit vote turns out, it’s a ‘no win’ for Europe

Britain’s EU referendum is the big risk event global markets are dreading. It could be a nightmare scenario, threatening to trigger a chain reaction that could plunge markets back into a new global catastrophe. The real worry is that the world is already slipping back into a black hole of uncertainty whichever way the vote goes. This time there may be no easy way back.

No wonder world policymakers are panicked. While European Council President Donald Tusk clearly over-exaggerated by warning Brexit could mean the end of Western civilisation, both the IMF and OECD are deeply alarmed about the consequences for the world economy and financial markets. The major central banks are already drawing up contingency plans and getting ready to intervene if the UK votes to leave the EU and markets descend into chaos. It is hard to see what they can do. Global currency, credit and equity markets are already highly agitated.

Europe should be especially worried. Whatever happens in the Brexit vote, Europe will feel deep shockwaves. It is a 'no win situation', with Europe standing to lose whichever way the vote goes. Europe is not long out of the 2009-2013 euro zone crisis and it has taken huge stabilisation efforts from EU governments and the European Central Bank to stop European monetary union and the euro falling apart. It would not take much to open up old wounds and set Europe lurching off into new economic and financial disorder.

A 'leave' vote will have an immediate impact. Capital flight out of the UK, a sterling currency crisis and the threat of economic ruination would hit British markets especially hard. Europe would not be spared and market speculators would quickly home in on contagion risks spilling over into the euro zone. Economic and financial stability would be knocked off its perch. The bears would scent blood and begin the hunt for 'who goes next'.

Even if the UK votes to 'remain', the barn door has been opened far too wide on European disintegration risks. Despite all the healing balm thrown into the ring from the ECB's monetary super-stimulus in the last seven years, the same old problems persist. Europe remains deeply divided, split between the economic haves and have-nots. Extremely rich and powerful Germany juxtaposes on the one side with struggling euro zone nations like Greece, Portugal and Spain on the other.

Immersed in deep debt, stifled by austerity and dogged by rampantly high unemployment, there is little chance of long-lasting economic recovery for these nations, especially considering the extremely challenging global backdrop right now. The threat of hard landing in China, instability in emerging economies and now the threat of Brexit contagion all pose serious dangers ahead for struggling euro zone nations. But there are bigger elephants in the room, not least growing anti-austerity protests in France and the risk that Italy falls victim to the deepening investor gloom.

If the risk of Greece going into national insolvency threatened to up-end global markets, the threat of Italy going into a banking and government debt default would be nemesis for the world economy. The problem would be far too great for the ECB’s limited resources to cope with. The recent election successes of the populist anti-austerity Five Star Movement underlines that there is a ticking time-bomb under conventional Italian politics. Italy remains the sleeping giant of the euro zones’ Doomsday disorders. In time Italy will come back to haunt the markets.

Despite the drive to negative interest rates, the glut of QE money and the high official ramparts surrounding the euro zone's vulnerable financial markets, the ECB's monetary defences are far from impregnable. With market jitters becoming more acute, peripheral yield spreads are already widening relative to German government bonds on safe haven flows. If markets decide to take on the ECB, it could trigger a dangerous re-run of the 1992-1995 and 2011-2012 deconvergence bloodbaths. European markets are highly vulnerable.

The real worry is that EU policymakers continue to kick the can down the road without solving the real economic and social inequalities dogging Europe. As long as Germany gets stronger, at the expense of the weaker European nations, political divisions will widen and the cohesive forces holding Europe together will continue to fragment. Anti-austerity protests and political extremism are on the rise and leading to deepening antipathy towards Brussels and the EU.

These trends are crystal clear in the usual suspects like Greece, where up to three quarters of voters are dissatisfied with the EU. More alarmingly similar trends are showing up in core countries like Austria, Netherlands and France which are witnessing the emergence of more inward-looking, nationalistic and anti-EU tendencies. It bodes badly for the future.

There is much more at stake in Britain's Brexit vote. The survival of European unity, the single market and the euro is on the line. Investors have good cause to be alarmed.

So far, the euro seems to be holding steady by default. Once the Brexit vote is out of the way, the markets will inevitably return to the thorny issue of Europe’s deepening political fractures and place their bets on eventual euro break-up risks down the line.

Euro parity versus the US dollar still beckons. Europe is not out of the woods by any stretch of the imagination, with or without Britain.

 

 

 

Brexit will shake investors’ faith in Britain to the core

It is no exaggeration to say that Britain stands at the edge of disaster. In two weeks time, UK voters will be making a momentous decision that will shape Britain’s future for generations. As the nation heads to June polls on whether to remain in or leave the European Union the stakes are high.  A majority vote in favour of a British EU exit (Brexit) could lurch the country into chaos for years. Its impact will be felt around the globe.

Britain is heading into the unknown and the country seems worryingly split down the middle. Judging by recent surveys, public opinion seems to be edging towards the Leave camp. If this continues, the final run-in to the referendum will be an anxious time for the nation and a source of rising instability for Britain’s financial markets.

International confidence in the UK could be shaken to the core. Britain’s strong growth record, its leading role as a global financial centre and even the survival of the 300-year old British union will be under a cloud. If Britain crashes out of Europe, Scotland has threatened another independence vote in order to stay inside the EU. Britain’s influence as a leading international power would begin to wane.

The main credit ratings agencies have already warned they would take a dim view of UK assets on a British break from Europe, warning that a sovereign downgrade might be inevitable. International confidence in UK investments would suffer badly. Britain is no stranger to currency crisis and the pound could take a beating. International investors would shun stocks, government bonds and industrial assets in the uncertainty. And it might take years before the UK can strike a favourable EU trade deal and forge a new working relationship with Europe.

International investors could lose out heavily, especially those that were coaxed into investing into Britain under Margaret Thatcher’s private sector renaissance in the early 1980’s, when international companies began flooding into the UK. Under sweeping structural reforms, Britain became a Promised Land of free enterprise and market-friendly deregulation for foreign investors. The added advantage was free admission into Europe’s single-market, with front-door access to the EU’s 500 million-strong consumer market.

Over the years, this has reaped rich rewards for Britain and brought strong inflows of foreign direct investments (FDI). Inward FDI has helped finance the UK’s current account deficit and provided vital support for the UK’s asset markets. The UK now stands as the world’s third largest destination for inward FDI behind the US and China, with the stock of FDI investments in Britain currently around 1.7 trillion US dollars. The UK is the top target for FDI flows into Europe thanks to Britain’s track record on providing a safe port for foreign money. All this could change very dramatically.

A beneficiary has been the UK car industry where Asian companies are major stakeholders. Since the 1980s, Japan’s Nissan, Toyota and Honda have built up significant UK manufacturing presences, while India’s Tata Motors has owned Britain’s Jaguar Land Rover since 2008. Any threat to Britain’s free trade access into Europe would cast these investments into doubt. Any barriers to free trading would be bad news for UK-based manufacturers and momentum to quit Britain and switch production to Europe could turn into a stampede.

As the United States learnt to its cost under the strong dollar regime during the mid-1980s, when many US companies switched manufacturing overseas to stay competitive, it has been extremely hard to win back business that has moved offshore. The US’s yawing trade gap is testament to that. Britain could end up in the same boat if international companies panic about losing eligibility for free trade status in Europe. FDI inflows would reverse, tearing a large hole out of Britain’s industrial capacity in the process. It would be bad news for UK growth prospects, for the balance of payments and for British industrial prestige.

Indeed, there is a possibility that Tata Steel’s recent decision to quit UK steelmaking is less to do with global over-supply and heavy loss-making in their UK plants and more to do with a loss of confidence in Britain’s industrial future due to Brexit fears. In addition, recent news of Tata Motors plans to build a factory in Slovakia, its first European JLR car plant outside the UK, could be a bad omen for British car manufacturing shifting into Europe if Brexit takes off.

Brexit also poses serious risks to Britain’s future as a global financial centre. The UK financial services sector is a vital part of the economy, employing over one million people, accounting for 12 per cent of total output and 11.5 per cent of UK government revenues. The City of London is not only home to over 250 foreign banks, but also the European headquarters for many of them. If Britons vote to leave the EU, London faces losing one of its top money spinners – the multi-trillion euros traded-derivatives business which the ECB would like to see housed on European and not UK soil. Furthermore, many foreign banks based in the UK might find it more prudent to comply with the EU’s regulatory framework by moving to Frankfurt or Paris. Brexit could spark a major bank drain out of Britain.

Britain’s economy looks vulnerable. Since the global financial crisis, the UK has grown faster than its Group of Seven partners, but only thanks to the economic fizz of zero interest rates, quantitative easing and loose fiscal policy. Without these policy boosts, underlying UK growth potential would be nearer to 1.5 per cent than the latest 2.0 per cent headline rate. The shock of Brexit, a quick foreign exodus out of UK investments and a collapse in British productive capacity and jobs could hit confidence hard, tipping the economy into a nasty recession.

In the worst case scenario, the UK could fall into a deep depression. Unfortunately, UK policymakers are running out of options to deal with new crises. UK interest rates are already at rock bottom and QE has already run its course. A sharply weaker pound would only be a small fillip for what little would remain of UK manufacturing locked outside of Fortress Europe. Foreign investors would be hit hard by the fall in their sterling-based assets. For international manufacturers, banks and financial services companies there are compelling reasons to get out quick while the going is good.

Brexit will rip the Great out of Britain

Nobody likes two-minded, ‘on the one hand and on the other hand’ economists – this economist included. But it is time to come off the fence and get the formalities over Britain’s imminent European referendum out of the way without further ado.

If Britain votes to remain in the EU on 23^rd June, the impact will be a damp squib and the dust should settle very quickly. But if UK voters opt to quit Europe, it will amount to a national economic disaster, on par with the 1930s depression and 2008’s financial crisis. This time round, there may be no easy way back from what would be left of Britain’s broken economy.

The economy and UK financial markets could be left scarred for many decades and, in the worst case scenario, it could lead to the eventual break-up of the British union if Scotland seeks independence. It will end up a horror show for the economy. Lasting harm to British export prospects, the loss of inward capital flows and the threat to London’s future as a major financial centre will do untold damage to Britain’s standing as a leading industrial nation.

Exit from the EU could mean the UK’s exclusion from the 500-million strong free trade area for an unspecified period of time. It would cast a major shadow over British business’ output, investment and hiring intentions. The risk of recession and mass unemployment would be a high probability.

Consumer confidence could be hit very hard as would the UK’s supposedly ‘rock-solid’ housing market. In recent years, UK property prices have been pumped up to fever-pitch thanks to near-zero interest rates, over-abundant mortgage finance and a rush of foreign money buying up ‘gold brick’ investments in London’s bloated property market. Brexit could sound the death-knell for a new property crash. People forget too easily that nationwide UK house prices collapsed by 20 per cent in the aftermath of 2008’s global financial crisis. It could easily happen again, but a lot worse. Up to 30 to 40 per cent could be wiped off property values.

Brexit could mark the start of a catastrophic collapse in foreign direct investment into the UK. Since Britain first joined the EU in 1973, North American and Asian companies have invested heavily in the UK economy to secure unbridled access to European markets. Outstanding FDI investments in the UK are now worth around $1.7 trillion and any reversal of confidence would put serious strains on the economy and UK currency if they decide to pull out and re-locate to the Continent.

Any threat to London’s dominance as a global financial hub would spark a serious outflow of overseas banks and investment funds from Britain, especially if Brussels decides to stack up legislative rules against institutions operating out of the UK. Major foreign banks have already warned that they are preparing contingency plans to move to European cities like Frankfurt, Paris and Dublin in the event of Brexit. Britain’s financial services dominated economy would be hit hard, compromising the UK’s fragile balance of payments position even more.

Brexit might mark the end of the 300-year old United Kingdom. Scottish nationalists have warned that Brexit would lead to another vote for independence. If Scotland leaves the union, at a stroke, up to 8 per cent of GDP would be lopped off the UK economy. Ratings agencies have warned this would warrant a major UK sovereign downgrade – bad news for the pound.

There may be little immediate economic effect in the aftermath of a leave vote, but in the longer run, Britain could be staring into the jaws of a depression. Putting numbers onto the horror show is extremely arbitrary, but the number 10 keeps cropping up. A depression would mean national output dropping at least 10 per cent and unemployment surging above 10 per cent.

The impact on financial markets would be immediate though – and the number 10 crops up again. Market surveys suggest the pound could lose as much as 10 per cent in face value and Britain’s FTSE-100 stock index could fall by 10 per cent. The odds are the falls would be even greater. The pound could easily touch parity with the US dollar and the euro. It could end up a very nasty rout.

Right now, markets still seem to be putting on a brave face, with the bias favouring the status quo and Britain staying put. But the real event risk is the chance of the unimaginable happening.

Judging by the bandwagon effect in the leave camp right now, consumers, business and markets would be wise to batten down the hatches and prepare for an unexpected shock.