Major Economies: After the Brexit
June 28, 2016
A riddle wrapped in a mystery inside an enigma
Although it was not completely unexpected, the United Kingdom’s vote to leave the European Union in the 23 June referendum represented a blow for global markets. On 24 June, the British pound tumbled to a three-decade low against the greenback, while stock markets were hit hard, particularly airlines, homebuilders and banks. Shock waves crossed the Channel and struck the financial markets on the continent: stock indices recorded the sharpest loses so far this year and the euro depreciated against the USD to March levels. Spillovers from Brexit continued to impact financial markets worldwide on the following days. Gold prices shot up and the Japanese yen strengthened as investors rushed to safe-haven assets amid rising global risk aversion. The stampede also sent some government bond yields down markedly due to the flight-to-quality.
While analysts are still factoring in the impact of the Brexit, its consequences promise to dominate the headlines in the coming months. Volatility in the global markets will likely persist in the short term, which will rattle economic sentiment, particularly in the Euro area and the United Kingdom. This situation will likely translate into a more cautious stance by the United States Federal Reserve, which will likely push back the timing of the next Fed hike.
From a somewhat longer-term perspective, the negotiations between the two parties will determine the extent of the Brexit’s impact. British authorities have to trigger Article 50 of the Lisbon Treaty, which allows a country to leave the Euro area in around two years. In this regard, while British authorities signaled that they would trigger the treaty in the fall, in an extraordinary meeting of the founding six EU states, European leaders urged quick action in order to reduce uncertainty. Prolonged Brexit talks have the potential to add to an already entangled political situation in Europe where Eurosceptic parties are clearly on the rise and the European project itself is being called into question. Therefore, a smooth transition is key to avoiding any economic downturn and ensuring that the strong bonds of friendship continue in the future.
Along with the Brexit, the global economy is far from seeing a sustainable recovery as growth in China continues to decelerate, domestic challenges are mounting in some countries and political uncertainty could resurface in the United States ahead of the November vote. As a result, FocusEconomics Consensus Forecast panelists expect the global economy to have expanded 2.5% in Q2, which is below the 2.6% rise in Q1.
See our newest update on the Major Economies region including an update on the impact of the Brexit
Brexit and higher economic uncertainty take a toll on global economic outlook
Shockwaves from the United Kingdom’s decision to leave the European Union are expected to reverberate across the globe. Although there is a high degree of uncertainty about the consequences as they will largely depend on the goodwill of both parties during the negotiation process and the timing of the divorce, Brexit has already unnerved market volatility worldwide and trimmed down economic sentiment. The economic analysts we surveyed for this month’s Consensus Forecast panel cut their 2016 global growth forecast by 0.1 percentage points to 2.6%. In 2017, the panel expects the global economy to strengthen to a 3.0% increase.
A sharp downward revision to the projections for the United Kingdom due to the Brexit led this month’s deterioration for the 2016 global outlook. While the Eurozone will likely take a hit as well,stronger-than-expected growth in Q1 prompted panelists to keep their forecasts unchanged for 2016. That said, panelists are expected to gradually adjust to the new situation in the coming weeks, which will likely translate into lower growth prospects for the common-currency block for this year and, particularly, 2017. Projections for the world’s largest economy, the United States, were also left unchanged, while an upward revision to Q1 GDP was behind the upgrade to Japan’s forecast.
Among developing economies, signs that China will not easily pull the trigger on new stimulus drove this month’s deterioration to this year’s ex-Japan Asia growth forecasts. Panelists became less pessimistic about the outlook for Latin America mainly due to reduced political uncertainty inBrazil. The gradual increase in oil prices helped stabilize the outlook for Eastern Europe andMiddle East and North Africa. Finally, severe security threats and economic imbalances continued to weigh on the Sub-Saharan Africa region.
UNITED KINGDOM | Brexit fallout reverberates across UK and beyond
In an unprecedented vote on 23 June, the United Kingdom decided to separate from the European Union, thus raising concerns regarding the future of the British economy. The fulleconomic impact of Brexit is not clear yet and the country will experience a prolonged period of uncertainty until new agreements are ratified. Following the Brexit news, Prime Minister David Cameron announced his resignation and also delegated the right to officially trigger the UK separation from the EU to his successor. The Leave vote prompted a collapse of the financial markets and the pound hit its weakest reading in over 30 years on 24 June. Besides the economic impact, there are other repercussions associated to the Brexit. Political risks such as the resurgence of the Scottish independence issue, increased tension within the ruling Conservative Party and the negotiation of new political links with the EU threaten the political stability of the country in the medium term.
The Brexit vote threatens to rattle the country’s strong macroeconomic fundamentals, even though the full impact of the exit will take years to quantify. The panelists we surveyed this months have downgraded their GDP forecasts amid low business sentiment, a significant weaker currency and a gloomier outlook for the labor market. Our panel expects the economy to grow 1.4% in 2016, which is down 0.5 percentage points from last month’s estimate. For 2017, the panel projects that the economy will grow 0.3%.
UNITED KINGDOM | Updated outlook as of 12 July
The economic and political situation in the UK has been changing by the hour since the 23 June vote to leave the EU. Following our Special Report two weeks ago, this update includes fresh forecasts taking into account the latest developments. We surveyed our panel of analysts to get their new projections as of 11 July. In this updated Special Report, an additional 10 analysts have provided forecasts for a total of 31 leading local and global institutions.
While 31 panelists provided projections for this round of forecasts, the GDP Consensus for both 2016 and 2017 did not change compared to the edition two weeks ago, indicating that, even as the situation is perhaps more clear than immediately following the vote, the majority of analysts are pessimistic about the UK’s outlook for this year and next. The GDP forecast from the larger panel of 1.4% for 2016 is in line with that of two weeks ago, which represents a downward revision of 0.5 percentage points from our pre-Brexit Consensus Forecast in June. For 2017, the Consensus still foresees the economy expanding 0.3%, which is on par with 26 June’s Consensus, but is down 1.8 percentage points compared to the pre-Brexit forecast. The Consensus Forecast panel projects the pound to close 2016 at 1.29 USD per GBP amid political uncertainty. Panelists expect the currency to remain broadly stable next year and close 2017 at 1.30 USD per GBP
UNITED STATES | Economy shows healthy dynamics in Q2
The U.S. economy has been in good shape overall in the second quarter following the slowdown in Q1. Consumer spending—the main engine of the economy—likely remained strong in Q2 asretail sales expanded for a second consecutive month in May. In addition, an increase in the ISMmanufacturing index was positive news in May, although the indicator still suggests soft growth in the sector. Meanwhile, the May jobs report took center stage as non-farm payrolls grew at the weakest pace since September 2010. On 8 June, Hillary Clinton, former first lady, secretary of state and senator for New York, became the Democratic Party's presumptive nominee for the 2016 presidential election. Clinton will run against the Republicans' choice of real estate mogul and television personality, Donald Trump, in an unusual battle to lead the country. American voters are divided and many are faced with a tough decision as they must choose between one candidate who, for many, is associated with supporting the dysfunctional Washington status quo, while many others believe a vote for Trump is equivalent to taking a dive into the unknown.
The UK’s vote to leave the EU has sent shockwaves throughout global financial markets and has the potential to cause a meaningful shock to Europe. The U.S. economy is not immune to economic slowdowns in the UK and the Eurozone, and the recent developments regarding the UK’s exit from the EU are casting a shadow on the U.S. outlook. FocusEconomics panelists expect GDP to increase 1.9% in 2016, which is unchanged from last month’s forecast. For 2017, the panel sees GDP growth at 2.2%.
EURO AREA | Brexit shocks Eurozone markets, clouds region’s future
The Eurozone economy picked-up pace in the first quarter of the year, recording the largest expansion in one year. Robust growth in the domestic economy drove the recovery, as an improving labor market boosted private consumption growth to an over-one-year high. Data for the start of Q2 is tentatively positive: industrial production rebounded in April and theunemployment rate remained steady at a multi-year low. That said, the United Kingdom’s vote to leave the European Union on 23 June has taken center stage in recent days and is casting a shadow on the Eurozone’s outlook. Negotiations will likely drag out as European rules set a two-year period for negotiating an exit—with a possibility for an extension—once formal notice from a member country has been given. While a country leaving the EU is unchartered territory with huge uncertainties in terms of economic consequences in the long term, in the near term, the Eurozone economy is likely to feel the effects of the vote through heightened volatility in financial markets along with pressure on the euro and reduced confidence.
The balance of risks to the Eurozone’s growth outlook has shifted to the downside in light of the United Kingdom’s recent vote to leave the EU and our panelists are still taking these recent developments into account. The current projection is for GDP to grow 1.5% this year, which is unchanged from last month’s forecast. Next year, analysts see GDP growth stable at 1.5%.
JAPAN | Abe postpones controversial sales tax hike
Although GDP growth for Q1 was revised upward on the back of stronger private consumption, on 1 June, Prime Minister Shinzo Abe decided to delay the implementation of a controversial sales tax hike from 8% to 10% in order to not derail Japan’s incipient recovery. The tax increase was originally supposed to take effect in April 2017, but it will now likely occur in October 2019. Recent data signal that the economy entered Q2 on a weak footing as April’s earthquakes and a strong yen continue to impact growth. In this regard, the United Kingdom’s vote for the Brexit on 23 June strengthened the yen to levels last seen in early 2014, which adds pressure to Japan’s fragile economic recovery and paves the way for further policy stimulus.
While a strong yen and weak global demand are weighing on growth this year, Abe’s decision to postpone the sales tax will slightly boost the Japanese economy next year. Nevertheless, the absence of deep structural reforms will continue constraining Japan’s potential growth. Analysts see the economy growing 0.6% this year, which is up 0.1 percentage points from last month's projection. Next year, they see GDP growth at 0.8%.
INFLATION | Global inflation stabilizes in May
Global inflation in May was unchanged at April’s 2.9% according to preliminary data. Althoughcommodity prices are still at relatively-low levels, the rally that has been observed since the start of the year has helped alleviate deflationary forces. While steady gains in the job market, particularly in advanced economies, and the continued upward trend in commodity prices should spur inflationary pressures, global economic uncertainty and weak growth in most of the world’s key economies promise to keep inflation contained.
Taking these developments into account, our panel of analysts expects that global inflation will be 3.3% in 2016, which is unchanged from last month's estimate. Panelists participating in our survey see inflation in 2017 rising slightly to 3.5%.
Written by: Ricard Torné, Senior Economist
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