Tags: brexit | global | economy | uncertainty

UK Vote Adds Uncertainty to Already Shaky Global Economy

UK Vote Adds Uncertainty to Already Shaky Global Economy
(Dollar Photo Club)

Friday, 24 June 2016 12:18 PM EDT

Britain's vote to leave the European Union adds a heavy dose of uncertainty to a global economy that is still struggling to reach full speed years after the global financial crisis.

The most immediate effects will be felt in Britain. But economists say the ripples could be felt much farther afield.

Companies will wonder whether to invest or locate in Britain during the years-long negotiations to define new trade conditions with the EU, its biggest business partner.

Across Europe, trade and immigration may lose ground to nationalism and protectionism.

The EU itself, minus market-oriented Britain, may turn to more government intervention and regulation. Other countries may eventually seek to leave the bloc.

"A new set of economic circumstances has been created, which the world will have to deal with," said India's Finance Minister Arun Jaitley. "Volatility is the new norm. And therefore, economies have to learn to live with crisis after crisis."

The global economy isn't in a crisis right at the moment, but growth is muted and uneven among countries. The International Monetary Fund forecasts growth of 3.5 percent for this year. The Chinese economy is slowing, the U.S. recovery has hit a slower patch, major emerging economies like Brazil are in recession, and Europe and Japan are stagnating.

That's not good enough to bring people out of poverty or get them jobs. Unemployment remains at a high 10.2 percent in the 19 countries that use the euro; in the U.S. it's a lower 5.5 percent, but the labor participation rate has not recovered since the recession of 2008-9, indicating many workers have not benefited from the stronger U.S. recovery.

Here's a look at what the vote means for the world economy.


The most direct economic pain will be felt by the U.K., while the direct consequences for the world economy are likely to be more moderate. Moody's Analytics estimates that global economic output would be 0.25 percent smaller after five years than it otherwise would have been, while the EU would be a full percent smaller and the U.K. 4 percent.

Then there are indirect events. Stock market plunges can make people feel poorer and less likely to spend. Uncertainty can make executives put off investments in new production.

"Uncertainty certainly impedes investment decisions, and with few signs of any pickup in the global economy we're probably going to see a slower rebound in capital spending," said Sara Johnson, senior research director of global economics with HIS Global Insight.


The market plunges following the vote are one reason for the world's central banks to keep their rock-bottom interest rates in place. In the case of the Federal Reserve, it makes it more likely that rate hikes expected this year will be put off. Low rates and monetary stimulus through bond purchases seem to have supported growth in Europe, the U.K. and the United States. But the long-term side effects of such policies are uncertain.


Many big companies use the U.K. as a base for their European operations. London's strength as a banking center is in part based on easy access to financial markets in Europe.

Regulatory approval to do business in the British capital means an all-access pass to the other 27 EU countries, a process called passporting.

Global banks like JP Morgan Chase have already said that they would have to move jobs from London to the European mainland if Britain leaves the EU.


The pound and euro both dropped Friday, which should make British and eurozone exports cheaper overseas. American travelers heading to Britain and the rest of Europe are going to find cheaper meals, hotels, souvenirs and museum admissions because the U.S. dollar will go farther against a weaker pound and euro. Airfare for peak summer months probably won't dip but any taxes and fees levied in Europe will be cheaper. For instance, all coach passengers leaving the U.K. for the U.S. pay 73 pounds for the Air Passenger Duty. That tax is now cheaper.


The impact on UK-EU trade would depend on how quick and amicable negotiations are on a new set of relations. Britain could wind up like Switzerland, which simply adopts EU requirements without having any say in how they are decided. Britain sends 44 percent of its exports to the EU, less than any other member country but still quite significant.

© Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Britain's vote to leave the European Union adds a heavy dose of uncertainty to a global economy that is still struggling to reach full speed years after the global financial crisis.
brexit, global, economy, uncertainty
Friday, 24 June 2016 12:18 PM
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