Brexit : How it Affects Everyone

The impact on global growth and inflation on the cyclical horizon is likely to be relatively small – and almost certainly not large enough to push the global economy into recession. Even if the UK fell into a recession, which is a distinct possibility, the direct knock-on effect on global GDP through lower UK import demand would be minimal as the UK accounts for only 3.6% of global imports of merchandise goods and 4.1% of global imports of commercial services.

image courtesy : John Cameron

The quick impact of Brexit has been felt internationally in two different ways: the diving estimation of the pound and securities exchanges in unrest. The pound fell by 7.6% to hit a multi-year low, a seismic move when you think about that the normal day by day move in the estimation of the pound against the dollar since 2012 has been 0.35%. Markets have additionally been sent into freefall as financial specialists tried to shed stocks for less unpredictable venture alternatives setting off a record multi-day loss of $3tn, in spite of the fact that there has been a ricochet back up in the course of the most recent few days.

In addition to the direct trade effect, business investment around the globe is likely to be dampened somewhat due to the heightened uncertainty about the global implications of Brexit and the tightening of financial conditions. If in doubt, companies will delay investment projects to assess how Brexit could affect them.

image courtesy : Kevin Grieve

The three related swing factors that could lead to a larger negative impact on the global economy are:

  1. The Dollar : A significant further strengthening of the dollar in response to global risk aversion would be a problem not only for U.S. growth prospects but also for all the dollar debtors in emerging markets, and could also push commodity prices lower.
  2. China : China might react yet again to dollar strength by allowing a more rapid depreciation of its currency against the greenback, which could intensify global growth and deflation concerns.
  3. Central Bank Action : Anticipation of further action by virtually all major central banks to limit the potential damage.