IT IS clear that the Remain campaigners were not exaggerating the short term impact of a successful Leave vote during the EU referendum campaign. They have instead very probably underestimated the immediate effect on the UK and global economies.
The problem is that the referendum result came at a time of what was at the very best a fragile recovery from the Global Financial Crisis. Seven years on from that crisis, US GDP growth and inflation are way below their long term trends, with labour productivity growth also down. The same applies to Europe. So the last thing we needed was Brexit.
The immediate impact of Brexit will be further weakness in equity and oil markets – and levels of volatility and uncertainty that we haven’t seen since at least 2008-2009. Companies across the West will thus cut costs and put investment decisions on hold.
The instant fallout from all of this will be a UK recession, with growth likely to fall across the rest of the West.
Turning to China, here some of the immediate implications:
- China says it is prepared to tolerate a further weakening of the yuan versus the US dollar, with the yuan already showing the greatest decline of all emerging market currencies since the Brexit result. Other emerging markets could be forced to respond. Competitive currency devaluations may follow as other countries attempt to protect their export trade. This would exacerbate global deflationary pressures. And in the US, the trade protectionists may gain an
upper hand in this years’ presidential election.
- Interest rates and the bank reserve requirement may also be lowered in China in a further effort to support exporters. This would of course further contribute to global deflation and international trade tensions.
- China might also once again loosen the credit tap in an effort to shore-up domestic growth. Q1 of this year saw a big rise in lending followed by declines in April and May. Another big jump in credit would further delay essential economic reforms.
As for the long term fallout, job losses in the UK seem inevitable as companies relocate overseas. Goldman Sachs and Vodafone have already said that they are considering moving jobs to the EU. There is also the risk of a brain drain as younger more educated people leave the UK because of weaker economic growth prospects.
It is also important to note that the Brexit vote was a symptom of a general discontent with policymakers across the West. The underlying cause of this discontent was their failure to recognise and deal with the end of the Economic Supercycle.
Until or unless policymakers rise to the challenge of the end of the Supercycle, more symptoms will emerge. These could include further success for populist politicians in Europe, including in next year’s French presidential election.
If the populist politicians gain more power, they will surely raise trade barriers. Globalisation would obviously also go into further retreat if the Brexit result leads to other countries leaving the EU.
But I hope that Brexit will not happen. There is still a chance that UK politics will undergo enough of a re-alignment to will allow the UK to stay in the EU. What also needs to happen is that the EU is willing to wait long enough for this re-alignment to happen.
Even if Brexit is avoided, however, some other major political, social and economic upheaval will occur over the next few years, say Holland or Italy deciding to leave the EU, unless policymakers acknowledge and compensate for the end of the Economic Supercycle.