Impacts of Brexit

Direct Effects

  • Even if the UK fell into a recession, which is a distinct possibility, the direct knock-on effect on global GDP through lower UK import demand would be minimal as the UK accounts for only 3.6% of global imports of merchandize goods and 4.1% of global imports of commercial services
  • Business investment around the globe is likely to be dampened somewhat due to the heightened uncertainty about the global implications of Brexit and the tightening of financial conditions…Nicola Mai estimates a negative impact on GDP of around 0.3%. The effect on the U.S. and other regions would likely be smaller

Related “Swing” Factors

  • Further strengthening of the dollar in response to global risk aversion would be a problem not only for U.S. growth prospects but also for all the dollar debtors in emerging markets, and could also push commodity prices lower
  • China might react yet again to dollar strength by allowing a more rapid depreciation of its currency against the greenback, which could intensify global growth and deflation concerns
  • …we anticipate further action by virtually all major central banks to limit the potential damage.
    • We expect the Bank of England to cut its official interest rate from 0.5% to zero relatively soon and, if more is needed, to restart quantitative easing
    • 50:50 chance on additional European Central Bank easing before Brexit
    • Bank of Japan easing at the next policy meeting on 29 July and sees a high probability of currency intervention to weaken the yen in the near future
    • …in the U.S., a July hike is now completely off the table, September is not impossible but a low probability because the dust from Brexit may not have settled yet and the U.S. presidential race will be in full swing

Most importantly, investors will have to factor in a higher chance of a stagflationary outcome over the next three to five years: even lower growth or near-stagnation coupled with a significant rise in inflation

  • Current or future governments turn more protectionist by erecting barriers to trade and migration…
  • …and take up or intensify the battle against inequality by redistributing income (through taxation and regulation) from capital to labor.

Source: Barrons (June 2016)