UK's SMEs stockpiling cash over fears a Brexit may harm economy

Mark Sismey-Durrant, CEO at Hampshire Trust Bank, stated in reports yesterday that the UK’s small to medium enterprises (SMEs) are stockpiling cash of more than £230,000 on average in current accounts, in order to mitigate risks from a volatile economy, should the UK decide to leave the EU in a “Brexit.” By the end of 2017, Britons will cast their votes on whether the UK should remain a part of the EU or separate from it. James Knightley, Senior Economist at ING, warned that the UK could face two years of uncertainty anyway, which may lead to a reduction in foreign investors, downward pressure on sterling, and a cautious approach by the Bank of England to raising interest rates. UK GDP growth in 2017 could also be half a point down, whilst the impact on businesses is hard to quantify at the moment. On the other hand, if the UK negotiates a stronger deal with the EU and stays in, growth of 3.5%+ in 2018 is a possibility, Mr Knightley has suggested.

Reuters

Britain's small to medium enterprises (SMEs) are stockpiling cash to mitigate risks from the potential seismic shift in the economy if UK leaves the European Union — a Brexit.

Hampshire Trust Bank's CEO said in a statement sent to Business Insider that SMEs are using the time between now and the referendum to boost cash reserves, because the polls are too close to call at the moment.

“Research we carried out earlier this year revealed that UK SMEs are building up their cash reserves, driven by the perceived need for greater ‘cash buffers’ and concerns about the volatility of the economy, with SMEs holding more than £230,000 on average in current accounts," said Mark Sismey-Durrant, CEO at Hampshire Trust Bank.

“The UK has been viewed as a haven of political and economic stability but this perception may shift. Uncertainty over EU membership, together with other global political developments, could result in SMEs holding on to more cash in 2016, rather than investing it, and it could dampen business appetite for growth.

"In order to encourage SMEs to invest in their businesses in 2016, we need a period of steady economic growth and a context of increased certainly over the future political environment.”

Britons will get to vote on whether the country should stay in or leave the European Union by the end of 2017. But if the referendum were to happen tomorrow, the polls show that the outcome would be too difficult to predict. Take a look at Credit Suisse's take here, and a variety of other polls here too.

Britain's Prime Minister David Cameron wipes his eye as he addresses a news conference during a European Union leaders summit in Brussels March 20, 2015. REUTERS/Francois Lenoir

However, the uncertainty has been well-documented within the markets community as a damaging factor for the UK economy.

For example, back in May this year, ING Senior Economist James Knightley and his team warned that "we will have to prepare for up to two years of significant uncertainty ahead of the vote."

"The clear risk is that this could unsettle businesses and households. As we saw with last year’s Scottish Independence vote (September 18), foreign investors may take fright with UK asset prices and sterling likely to come under downward pressure. The economy may well lose some momentum and the BoE may raise interest rates more cautiously," said the bank's analysts.

UK GDP growth in 2017 could be half a point lower, regardless of the outcome, because of this, Knightley says.

"Should the UK negotiate a stronger deal with the EU and vote to stay, there could be a substantial bounce back in growth (3.5%+ in 2018) as delayed investment projects are finally implemented and confidence returns. UK asset prices will rebound," said ING.

The business impact is uncertain

Reuters

It is hard for businesses to quantify the potential costs.

Business for Britain said in a report entitled "Change, or Go," claims that the average British household would be nearly £1,000 ($1,600) better off in a Brexit because the UK could have to share the highs and lows with the EU.

And the report wasn't written by any old bunch of eurosceptics, the report was chock full of influential business leaders and economist such as Mark Littlewood of the Institute of Economic Affairs, John Mills of JML, and fund manager Helena Morrissey of Newton.

However, a team of Bank of America Merrill Lynch analysts, led by Robert Wood, said last month that if Britons vote to leave the EU in the referendum, the UK would experience so much economic pain if it left the EU that it would make the EU stronger, because no other country would ever want to leave.

"In our view there would be serious economic fall-out for the UK in the short- and long-term if voters choose to leave the EU," said BAML analysts in the report.

"In the long term, the UK could cope outside the EU: other countries do. But coping does not mean the UK would be better off: exiting would be a costly backward step in our view. How costly would depend on post-exit policies. The fallout could be acute if Britain chose to withdraw from the process of globalisation."