A solid week has passed since British voters shocked the world with their decision to exit the European Union. This has given us some time to analyze the possible economic impacts of Brexit, as it is now known.
From an economic viewpoint, its ramifications on global growth are negative. When borders become more closed, impairing the flow of capital, decreasing access to workers and lowering trading opportunities, the impact on the economy is obvious. Just imagine if California or Texas or New York decided to secede from our union. It would affect not only the citizens of those states, but also people in Michigan and the rest of the world.
A growing and healthy economy lifts most people, to varying degrees. On the flipside, a stagnant and shrinking economy – a result much more likely after Brexit – disproportionately hurts people living on the lowest rungs of society’s economic ladder. Early voter analysis shows that poorer, less educated voters chose to leave Europe. Voting against one’s own economic interest is not a new phenomenon.
The vote to leave Europe was clearly based on non-economic reasons.
With the Brexit vote, the deciding factor hinged on issues of cultural sovereignty, rather than economic theory. Specifically, concerns of immigration policy played a serious role that tipped the balance.
Regardless of the motivations of the “leave” voters, the implications for the economy were indicated by the upheaval in financial markets. In part, the unprecedented decline of the pound sterling and stocks throughout Europe was a result of surprise. Unexpected events aren’t normally positive for financial markets. Nonetheless, the recovery in stock prices this past week could have been expected. Nothing moves in a straight line in capital markets.
However, the likely longer term effects can be visualized by watching an inchworm. The stuttering, stop-go nature of the economy’s forward progress can result in miscalculations along the way by businesses and investors. Those newly-launched expansion plans or that just-signed contract now face a different set of assumptions than originally planned. The global economy just became a bit more like an inchworm.
Looking forward, business confidence has also been impaired. Whether this hit to confidence is longer lasting will depend on how politicians throughout Europe and the UK handle the aftermath. Since the vote, uncertainty is heightened. In addition, the realities of the massive complexity of actually exiting the European Union hasn’t helped. It’s been aptly described as a messy divorce.
In my view, the Brexit vote has injected tangible uncertainty for businesses and markets, on a global scale. What affects the UK, affects the rest of Europe. And, what affects Europe, affects the US and Asia. With central bankers running out of policy bullets – with interest rates already at rock-bottom levels – and with global politics running on a potent mixture of anti-establishment and anti-globalization fuel, the situation will likely be uncomfortably volatile for investors.
In investing, discomfort can be a red flag or an opportunity. It is never easy to spot the difference.