A case can be made that the market impact of “shocks” depends on the state of the economy when they hit. The failure of Bear Stearns in March 2008, for example, may have triggered a negative spiral of events partly because it occurred just after the US economy had entered a recession (in January). Similarly, the severity of the 2011-12 Eurozone crisis may have reflected its interaction with a global economic slowdown, due partly to a downturn in the 3-5 year US Kitchin stockbuilding cycle.

Global economic growth has been weak but stable in early 2016 and the view here – based on monetary trends and leading indicators – is that it will strengthen during the second half. As in 2011-12, a downswing in the US Kitchin cycle has contributed to recent softness but this may be coming to an end: the ratio of business inventories to sales fell in April for the first time for 13 months and local peaks in the ratio usually occur around troughs in economic momentum.

The above view suggests that the negative impact of a Brexit vote on global markets would be smaller than many fear. It is questionable, moreover, whether such a vote would represent a “shock” as normally understood – markets are prepared for the possibility (it is a “known unknown” in Rumsfeld-speak) and there would be no change to economic / financial arrangements for a sustained period.

The UK fallout, of course, would be greater but a similar argument applies: recent data indicate that the economy has gained, not lost, momentum going into the vote and monetary trends continue to give a positive signal for prospects, suggesting that the immediate negative impact would be containable. As previously discussed, the Treasury “forecast” that a recession would ensue is circular: it assumes, arbitrarily, that economic uncertainty would rise by an amount historically associated with recessions.

Sterling would no doubt fall sharply in the wake of a Brexit vote but would it remain permanently lower? The trade deficit in goods and services was a modest 2.0% of GDP in 2015, unchanged from 2012, arguing against exchange rate overvaluation. The wider current account deficit – 5.2% of GDP last year – mostly reflects a shortfall on investment income but this has been more than offset by a capital gain on the external assets / liabilities position; the current account adjusted for this capital gain has recently been in surplus.