Impact of the Brexit Vote: Scary But Mixed

A recession is unlikely, but a market correction is likely underway. Commodity prices will turn volatile. A bump for Trump?

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With Britain set to quit the European Union, financial and political reverberations will spread across Europe, China and Japan as well as the U.S.: The global economy is in for some rough seas.

Here are our early answers to key questions.

What’s the impact on the U.S. economy? Brexit won’t spawn a recession in the U.S., but slower growth is inevitable as the dollar strengthens -- a damper on U.S. exports -- and as confidence flags for consumers and investors. Near term, firms pay put expansion plans on hold.

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We see U.S. GDP growing by 1.8% this year, down a couple of ticks from an earlier forecast of 2%. For next year—2%, dialed back from 2.4%.

Will the Federal Reserve boost interest rates in the next six months, as has been widely expected? Almost certainly not. A hike would be seen as out of sync with other central banks—not the note that Fed Chair Janet Yellen and others want to send at this time.

What’s in store for the stock market? A bumpy ride, for sure. But there’s no need to panic, even if stocks enter a correction in the months ahead.

Commodities, especially industrial metals, are in for a rocky journey after pre-vote prices had seemingly hit bottom. Now, 5%-10% lower seems probable. Oil is likely to fall a bit. Gasoline prices, too. Gold, though, will trend higher.

Generally, markets are allergic to uncertainty, and there’ll be plenty to come.

Does the United Kingdom’s pending exit from the EU foretell a recession in Europe? Not this year, though growth in Europe was already an anemic 1.5%. But we see even odds of recession in 2017, again depending on how long instability lasts.

There’s no chance of a global recession. The world’s two largest economies—the U.S. and China—are seeing growth slow but will stay comparatively strong.

Will other EU members follow Britain out the door? Some will try, for sure. Most of the attention is focused on France and the Netherlands, where Eurosceptic forces are highly mobilized and trying to ride a wave of post-Brexit momentum to greater political success. Though the chances of these and other countries voting to leave the EU are real, chances of it happening are small.

Reform is at least as likely as retreat—a compromise that focuses on giving back some powers to the remaining 27 member states to appease them. There’s talk that the EU might urge the U.K. to reconsider. That’s unlikely, given that France and a few others are keen to move the divorce along quickly, fearing that a long good-bye would simply give anti-EU sentiment extra time to grow.

Other consequences? A trade deal between the U.S. and Europe is dead. Instead, European officials will focus on figuring out rules for trading with Britain.

Among the political ripples? Don’t be surprised if Donald Trump gets a boost in presidential polls in the coming weeks. The U.K. vote will embolden his supporters, and maybe attract others who like his call to keep out illegal immigrants and Muslims. A bump in his support could cause Republican officials to end their bid to replace him.

The Kiplinger Washington Editors
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