Brexit's Longer-Term Economic Waves Could Take Years to Play Out
25 June 2016 - 12:32AM
Dow Jones News
By Marcus Walker and Ian Talley
The U.K.'s decision to quit the European Union rocked global
equity and currency markets Friday, but the full impact to the
wider economy may take years to play out.
In the U.S., concern that deeper unrest in Europe will wash over
the global economy threatens to further damp business investment
and erode consumer confidence. At the same time, a rising dollar
will make imports cheaper, and uncertainty could help keep mortgage
rates low for still longer.
Economists worry further weakening of the EU could tilt the U.K.
and the region back into recession. Some analysts said the economic
harm can be diminished if the British and other governments handle
the terms of Britain's separation well.
In the U.S. and Japan, a continued rising of the dollar and yen
would weigh on exports as their products become less attractive to
consumers overseas, and further sour business investment. A rising
dollar could also confound central bank policy and further delay
any rate increases by the Federal Reserve.
To help reassure jittery markets, the Group of Seven largest
industrialized economies said in a statement they were monitoring
global currency volatility and prepared to act against disorderly
markets.
Business groups called on the U.K. government to quickly set out
how the country's divorce from the EU will work, and to clarify
Britain's international economic arrangements before getting bogged
down in political fighting.
"The urgent priority now is to reassure the markets," said
Carolyn Fairbairn, director general of the Confederation of British
Industry.
The sharp fall in the pound could fuel a sharp and damaging rise
in inflation, helping push the U.K. into a recession and force the
Bank of England to raise rates, a measure that would further crimp
growth. Unlike in 1992, when a devaluation led to economic
recovery, the central bank isn't in a position to sharply cut
interest rates to spur growth, because rates are already near
zero.
The combination of a cratering pound, other financial-market
volatility, and lengthy uncertainty are expected to hurt exports
and business confidence in many other European countries.
German manufacturers expect to take a hit. "It won't be long
before our machinery exports to Britain decline noticeably," said
Thilo Brodtmann, chief executive of the German engineering-industry
association VDMA.
The potential political effects could cause the greatest
economic disruption. Anti-EU nationalists in France, the
Netherlands and elsewhere are pushing for their own countries to
vote on leaving the EU.
"Brexit alone wouldn't be a disaster for the global economy, but
a breakup of the EU would," said Megan Greene, chief economist at
Manulife. "I don't think it's likely, but it's a higher risk than
it was yesterday."
--Paul Hannon contributed to this article.
Write to Marcus Walker at marcus.walker@wsj.com and Ian Talley
at ian.talley@wsj.com
(END) Dow Jones Newswires
June 24, 2016 19:17 ET (23:17 GMT)
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