Uncertainty Reigns in Global Economy Following Brexit Referendum

OTTAWA, July 20, 2016 /CNW/ - The victory for the "leave" side in the British referendum is already having a negative effect on the economies of both the European Union (EU) and United Kingdom. Prior to the Brexit referendum results, the U.K. economy was expected to expand by 2 per cent this year and 2.2 per cent in 2017. Even under the most optimistic scenario, the U.K. economy will likely experience a mild recession, according to The Conference Board of Canada's World Outlook: Summer 2016.

Meanwhile, the European Union (EU) economy will not be impacted to the same degree as the British economy but the ongoing uncertainty will make annual real GDP growth of 1.6 per cent in the 2016-17 period difficult to attain.

"The high degree of uncertainty makes it difficult to assess how severely the global economy will be affected by the Brexit," said Christopher Beckman, Principal Economist, The Conference Board of Canada. "The full economic impact of the referendum vote will largely depend on the political ramifications that emerge over the next few years. If the Brexit eventually triggers a break-up of both the U.K. and the EU, the global economy, which is already experiencing weak growth, will be hurt even more."

Highlights

• The world economy will expand by a tepid 2.4 per cent this year and 2.8 per cent in 2017
• The U.K. economy will likely slip into recession following the victory by the "leave" side in the recent referendum
• The Brexit should not have a significant effect on the U.S. economy.

The ongoing uncertainty will impact both household and business spending in the U.K. and EU. This uncertainty affects the hiring and investment plans of numerous firms. Large multinational corporations and financial institutions that currently use London as a way of servicing the EU market could eventually decide to move some of their operations to Frankfurt, Milan, Dublin, Amsterdam or Paris. This could hurt London's current role as the financial capital of Europe.

For countries using the euro, the economic situation was already grim even before being sideswiped by the Brexit. The euro zone has been dealing with the ongoing saga in Greece; the migrant crisis; difficulties in Italian banks; France's backpedalling on much-needed labour market reforms and high unemployment in countries like Spain. More recently, the terrorist attack in Nice and the attempted military coup in Turkey adds another layer of uncertainty to the fragile outlook. Germany likely has the most to lose given that the U.K. is its third largest export market. Brexit's sweeping impact could subtract a half a percentage point from euro zone real GDP growth in 2017.

The Brexit crisis will have a minimal impact on the U.S. economy over the near term, given that the U.K. accounts for 4 per cent of total U.S. exports. However, the medium- and longer-term implications are more difficult to assess. Overall, the U.S. economy will expand by 1.9 per cent this year and 2.5 per cent in 2017.

Asia is more exposed to the EU as it is a major export destination for China. Fortunately, other countries in the region are not as vulnerable. The Asia Pacific region is expected to expand by 4.5 per cent this year and next as the slowing of China's economy and continued weakness in Japan will offset improving conditions in India.

In all, the world economy is forecast to expand by a tepid 2.4 per cent this year and 2.8 per cent in 2017.

Join Glen Hodgson, Senior Vice-President and Chief Economist, and Kip Beckman, Principal Economist, World Outlook during a live webinar as they discuss the implications of Brexit for the global, North American and Canadian economies on July 21, 2016 at 11 AM EST.

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SOURCE Conference Board of Canada

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