UK: Important indirect effects of Brexit – Wells Fargo

Research Team at Wells Fargo, suggests that the British economy likely will suffer most of the direct effects of Brexit in the near term.

Key Quotes

“On average, countries in the EU-27 send 7 percent of their exports to the UK. American exports to the UK totaled $56 billion in 2015, but this amount accounts for only 4 percent of U.S. exports or only 0.4 percent of U.S. GDP. Even if the U.K. economy slips into a modest recession in coming quarters, which now seems increasingly likely, the direct trade ties between the EU-27 and the UK and the US and the UK are too small to drag these economies down as well.

In our view, however, the indirect effects of Brexit on the rest of the world could be more important than the direct effects. First, there are the financial market effects to consider. There has been a notable tightening in financial market conditions today and markets likely will remain volatile in the near term. If financial market tightness continues, economic activity in other countries could be negatively affected.

There is also political fallout to consider. Anti-EU nationalist parties in many European countries have been emboldened by the Brexit vote and are now calling for their own referenda. Most of these nationalist parties are on the political fringe, and we do not expect a wave of EU referenda anytime soon on the continent. However, the EU bureaucracy is not warmly embraced in most European countries, and the idea of exiting the EU could fall on fertile political ground there.

Europe has been integrating economically and politically for the past 50 years or so. Brexit is the first reversal of that integration. It seems that populist and nationalist sentiment around the world has not been this high since the 1930s, and there are some important elections coming up this year and in 2017 (e.g., in the United States, France and Germany). In our view, Brexit is a monumental decision that could set in train an unwinding of the globalization that has occurred over the past few decades. These geopolitical effects could have important economic implications in coming years.”