Business Economy 25 Jun 2016 Brexit vote adds to ...

Brexit vote adds to uncertainty over global economy

Published Jun 25, 2016, 9:26 am IST
Updated Jun 25, 2016, 11:08 am IST
Central banks recognize the dangers and have made clear they will pull out the stops to calm jittery markets.
Specialist Jay Woods works on the floor of the New York Stock Exchange. (Photo: AP)
 Specialist Jay Woods works on the floor of the New York Stock Exchange. (Photo: AP)

London/Sydney: The first indication of how Britain's vote to leave the European Union will affect the global economy will come from business surveys, with the hard data to follow -- a lag that increases uncertainty over growth.

Before Thursday's vote, most global economic institutions had warned of collateral damage from a British exit, with the International Monetary Fund listing the referendum as a key global risk.


"A Brexit could do severe regional and global damage by disrupting established trading relationships," Maurice Obstfeld, the Fund's chief economist said when the IMF published a half-yearly assessment of the world economy in April.

Central banks recognize the dangers and have made clear they will pull out the stops to calm jittery markets.

The IMF urged a smooth transition and Group of Seven finance chiefs said in a statement they were monitoring market developments, recognizing that disorderly moves in exchange rates can harm economic and financial stability.


The warnings over the risks to the global economy have accompanied signs that growth across the world may be cooling.

The IMF has already downgraded its global growth forecast this year, projecting a "modest 3.2 percent" for 2016, a rate pushed up by emerging market economies. Growth in advanced economies such as the euro zone is expected to be much smaller.

On Friday, after the vote, government officials and investment bank economists were on guard.

"The global economy was fragile before and is more so today," Citi economists said in a report.


But whereas financial markets react instantly to shocks such as the vote for a Brexit, the deeper impact on economies takes time to show. The concerns of those who hire, trade and make business investment decisions can be left to fester and grow.

"We will see the impact in consumer confidence and business surveys initially. It will show later in the hard data," said Sarah Hewin, chief economist for Europe at Standard Chartered Bank.

A particular focus, she said, would be on monthly Purchasing Manager Indexes, which poll global business intentions in manufacturing and services.


"A weaker PMI ought to be reflected in industrial production later," Hewin said.

Next week's PMIs will not reflect the vote but the uncertainty leading up to it. Economists will have to wait until mid- to late July for the first estimates to emerge.

More uncertainty

Although it is not certain that Brexit will have as big a global impact as the IMF and others have suggested, many economists think it will.

"In the real economy, global GDP is definitely going to be affected, U.S. GDP, Japan GDP, GDP everywhere!" said Bob Takai, president at Sumitomo Corp Global Research in Tokyo.


Britain, of course, will be in the cross-hairs. A Reuters poll of 70 economists and analysts on Friday gave a 53 percent chance of a recession in the coming year with growth at least flatlining in the coming two quarters.

How Brexit affects the euro zone may be key. The bloc's economy was just beginning to take off after trillions of euros were pumped in to it by the European Central Bank. But now the EU as a whole faces bigger risks.

"Sentiment and currency effects could knock 0.6 percent off GDP by 2017. Political contagion might even be bigger," ING Research said in a note.


A harbinger for this could be the July 25 Ifo business climate indicator, measuring economic developments in Germany. June's indicator was released on Friday, reflecting pre-Brexit data and showing solid growth.

Economists say such growth will not last, and see implications far beyond Germany and Europe's borders.

"Because the EU is China's largest trading partner, a slowdown in the EU's economy will hamper China's growth" said Wu Jieyun, analyst at China International Capital Corporation in Beijing. "As an emerging market economy, China will be hit by the risk-off sentiment."