UK referendum: Blame the weather, not Brussels

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The outcome of today’s crucial UK referendum on EU membership will partly depend on how many of the 46.5 million registered voters cast their postal votes and turn up today at voting booths which opened at 07.00 (UK time) and will close at 22:00.

Opinions polls have concluded that a lower voter turnout today would favour the Leave vote while a higher turnout would favour the Remain vote. 

But intentions to vote are not the same as actually ticking the ballot box. Bad weather is more likely to keep people at home and turnout low, favouring the Leave vote while dry weather would in theory encourage people to vote, in turn favouring the Remain camp.

There have so far today been scattered showers across the UK and the Met Office has issued an amber weather warning for the East of England, London and South-East England, with predictions of thundery showers throughout the day.

However, the Financial Times is reporting that in many parts of London there are long queues at several polling stations and the Met Office is forecasting largely dry and cloudy weather elsewhere in the UK.

It is somewhat ironic that the unpredictable British weather, a favourite topic of conversation, could potentially change the British economic landscape for years to come.

The consensus expectation is that if the UK votes to remain in the EU, sterling, UK equities and to an extent the euro and global equities will rally sharply. But this rally could start to fade after a few days, as markets refocus on global data and events and the British turn their attention to the all-important matter of the Euro 2016 championships and perennial question of whether Andy Murray can win a second Wimbledon title.  

But acute uncertainty and market volatility would likely persist for weeks and potentially months should the leave camp win today’s referendum, particularly if it wins by only a very narrow margin and/or turnout is low.

Importance of how people will vote …and who will turn up to vote

After months of endless and often vacuous arguments, counter-arguments, threats and counter-threats from both the Leave and Remain camps, it all boils down to how 46.5 million registered voters in England, Wales, Scotland and Northern Ireland will vote in today’s referendum on EU membership (see Figure 1).

olivier desbarres - blame the weather fig 1

More precisely, the outcome of today’s crucial referendum will partly depend on how many voters cast their postal votes and turn up today at voting booths which opened at 07.00 (UK time) and will close at 22:00. Opinions polls have concluded that a lower turnout today would favour the Leave vote while a higher turnout would favour the Remain vote. Note that today’s vote has no requirement for a minimum turnout.

 

Decided voters in favour of Remain more complacent…until now

First, until recently, decided voters in favour of leaving the EU have tended to express a slightly higher willingness to vote than decided voters in favour of remaining in the EU.

In a poll conducted in May, You Gov asked 5,000 “respondents to say on a scale from 0 to 10 how likely they are to vote in the EU referendum. Leave supporters had a mean score of 9.07 with Remain supporters just behind on 8.93”. But a new ORB poll for the Daily Telegraph found that the predicted turnout for Remain voters rose from 54% in a 7th June poll to 69% in a 21st June poll and that conversely the predicted turnout for Leave voters turnout fell from 69% to 64% during the same period.

There a number of possible explanations for this change. The Leave campaign dramatically surged ahead in June polls, which might have made Brexit supporters more complacent and less likely to vote and conversely motivated Remain voters to express a desire to vote. The recent surge for the Remain camp and the boost in its expected turnout also follows the horrific murder of the pro-EU member of parliament Jo Cox on Thursday 16th June.

You Gov simulated referendum outcomes based on turnout and concluded that:

“A low turnout may indeed favour the Leave campaign, with the largest lead at the lowest reported turnout. In other words Leave have the greater number of supporters who say they are certain that they will vote. As the number of people saying they will turnout increases that lead for Leave rapidly disappears, with Remain moving ahead. The relationship is not linear, however, and further gains for Remain are virtually non-existent at the highest levels of turnout”.

The reason for the non-linearity is partly due to whether sub-groups of voters turn up in greater numbers. Specifically, voters under the age of 35 who tend not to show up to vote are more likely to vote Remain while those over 60 are more likely to vote Leave. Of course, in an extreme scenario where turnout is 100% (i.e. all registered voters cast a vote) the actual outcome will depend solely on the underlying support for Leave or Remain.

 

Undecided voters more likely pro-EU but also less likely to vote

The other reason that turnout will likely impact the final result comes down to undecided voters who account for 10-15% of all voters. Given that recent opinion polls show the Remain and Leave camps almost neck and neck amongst decided voters, undecided voters could easily swing the result either way – if, and this is a big if, they turn up to vote.

Undecided voters are less likely to take the time off to vote today than decided voters. At the same time they are more likely to vote in favour of the status quo – remaining in the EU – as “they have not been sufficiently persuaded by the argument for a change”. The latest ORB poll assumes that undecided voters are three times more likely to vote Remain than Leave. Therefore, if turnout is high this would suggest that undecided voters have turned up to vote, benefitting the Remain vote. Conversely, if turnout is low, undecided voters have likely stayed at home, benefiting the Leave vote.

 

Intention to vote not the same thing as actually voting – cue the British weather

But all of this analysis is based on intentions to vote which is not the same as actually getting to the voting booth and ticking the ballot box. And this is where the weather may play a part. Bad weather is more likely to keep people at home and turnout low, favouring the Leave vote while dry weather would in theory encourage people to vote, in turn favouring the Remain camp.

There have so far today been scattered showers across the UK and the Met Office has issued an amber weather warning for the East of England, London & South-East England, with predictions of thundery showers throughout the day.

However, the Financial Times is reporting that “in many parts of London there are long queues at several polling stations, with little indication early voters had been put off by the rain”. Moreover, the Met Office is forecasting that, beyond the East and South-East of England, weather will be “largely dry and cloudy with some bright or sunny spells, with some showers affecting western Scotland and Northern Ireland through the day”.  It is somewhat ironic that the unpredictable and often gloomy British weather, a favourite topic of conversation, could change the British economic landscape for years to come.

 

Fast forward to morning of Friday 24th June

Regardless of the weather and turnout, the 382 local counting areas which make up the 11 regions and Northern Ireland will start releasing voting counts around midnight and will continue to do so throughout the night. The official UK count is likely to be announced Friday morning or at the latest early afternoon (UK time), barring any major local or regional re-counts.

The consensus expectation is that if the UK votes to remain in the EU, sterling, UK equities and to an extent the euro and global equities will rally sharply. But this rally could start to fade after a few days, with “business-as-usual” resuming (see Europe – the Final Countdown, 21 June). Markets will ultimately re-focus their attention on global data and events, including the forthcoming US Federal Reserve policy meeting on 27th July.

In the UK, the near-term focus may well be on the prospects of England, Wales, Northern Ireland and Republic of Ireland in 2016 UEFA European Championship – a somewhat lighter yet as passionate source of debate as to whether the UK should remain or leave the EU. And of course, there will as always be much angst and discussion as to whether Andy Murray can win a second Wimbledon title when the tennis championships kicks off on Monday (a tournament itself subject to the vagaries of the British weather).

 

If Leave vote wins, the uncertainty has only just begun

But unlike the relatively straightforward scenario in which the UK votes to stay in the EU, acute uncertainty and market volatility would likely persist for weeks and potentially months should the leave camp win today’s referendum, particularly if it wins by only a very narrow margin and/or turnout is low.

I highlight six potential sources of uncertainty, which open up a number of possible scenarios (summarised in Figure 2) and could keep sterling and UK equities on the back foot:

  1. Prime Minister Cameron’s future;
  2. The risk of the British government ignoring the referendum result;
  3. The risk of the British parliament ignoring the referendum vote, the government re-negotiating a deal on the UK’s membership to the EU and holding another referendum;
  4. The risk of a second Scottish independence referendum;
  5. The risk of a protracted UK exit from the EU leaving the door open to a decision reversal; and
  6. The re-negotiation of new trade treaties.

Importance of how people will vote …and who will turn up to vote  After months of endless and often vacuous arguments, counter-arguments, threats and counter-threats from both the Leave and Remain camps, it all boils down to how 46.5 million registered voters in England, Wales, Scotland and Northern Ireland will vote in today’s referendum on EU membership (see Figure 1).

Olivier Desbarres

Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.

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