Sarah Hewin, Chief Economist, Europe
The UK economy is likely to struggle
Expect a period of uncertainty while a new prime minister is chosen and the negotiating strategy is decided. Parts of the economy have slowed and business decisions have been delayed ahead of the referendum: commercial and residential real-estate transactions, car purchases, and business investment have suffered. Activity in these sectors will likely remain subdued, and the ‘leave’ vote is likely to further undermine confidence.
GDP growth in the second half of 2016 could fall below its current subdued pace, turning negative in one or two quarters and pulling 2016 growth down to 1.2 per cent (versus our current forecast of 1.9 per cent). The ‘leave’ vote could also reduce 2017 growth to 0.5 per cent from our current forecast of 1.5 per cent.
We think that the most likely response by the Bank of England (BoE) will be to cut rates in the face of a weaker growth outlook, despite upward pressure on inflation from a likely fall in the British pound. The BoE could move as early as August if growth activity was slowing sharply.
Downside risks on the euro to prevail
The UK’s vote in favour of leaving the European Union (EU) raises the question whether the EU will implode. Markets will likely keep questioning who might be next, and with fringe parties in Europe on the rise, there will be no shortage of dissent. But despite the elevated risk, we do not think Brexit is the beginning of the unravelling of the EU. For markets, the great worry is that euro-area countries might turn more eurosceptic, blocking the closer integration needed to stabilise the single currency.
Most euro-area countries are suffering from high unemployment and many have low confidence in the EU institutions, with or without Brexit. We expect downside risks on the euro to prevail and we lower our GDP forecasts for the euro-area to 1.2 per cent from 1.4 per cent for 2016 and to 1.2 per cent from 1.5 per cent for 2017.
Thomas Costerg, Senior Economist, US
Brexit is another dent in the Fed’s plans to ‘normalise’
The UK’s vote to leave the EU is likely to keep the Federal Reserve’s (Fed) anxiety elevated for some time, thwarting plans to continue hiking interest rates.
While the Fed had already pared down its tightening bias at its June meeting, in part due to the approaching UK vote and the risks it entailed, the negative outcome will further dilute the tightening bias, in our view. In particular, we would not be surprised to see the Fed starting to worry about ‘second-round effects’ on the future of the EU, and how this unsettled picture could threaten the global economy.
In other words, even if US employment rebounds following a dismal May print, and more generally if US data improves over the summer after a mixed first half 2016, we would still expect UK-related concerns to keep the Fed firmly on hold in the coming months. The possibility of a 27 July rate hike looks small to us. Fed action in coming months will depend largely on economic data and developments in the US stock market, high-yield bond markets and the US dollar. Contagion from Brexit via ‘imported’ tightening of financial conditions is the Fed’s main concern, post-Brexit, rather than the direct impact on potentially weaker trade with the UK.
Edward Lee, Head, ASEAN Economic Research
Asia – more resilient than other parts of the world
Asia’s fundamentals should prove resilient, particularly when compared to the initial sell-off in the financial markets. The direct growth impact of Brexit, while negative, should not be significant. The UK generally accounts for no more than 2 per cent of total trade for most Asian economies. The bigger direct growth worry will come if euro-area growth suffers as a result of Brexit. Asia’s direct trade with the euro area ranges from about 10-15 per cent of total trade for each economy.
But what is more evident at the moment is that growth deterioration from the Brexit event is more pronounced in the UK versus the EU. In addition, if there is any comfort to be taken from the situation, it is not a growth shock from strong to negative growth but possibly an extension of the current stagnant growth in the developed economies. Policies are already growth-supportive. They just need to get more so. Asia will not be insulated from the event. This is especially so for smaller and more open economies such as Singapore, Hong Kong and Taiwan. But Asia is possibly better placed than most in this current environment.
Although we expect Asian assets to come under pressure in the short run, particularly Asian local currency assets, we remain positive on the region and we expect corrections to be short-lived. We maintain our forecast that China will grow by 6.8 per cent this year, and we expect any depreciation of the Chinese yuan (CNY) to be managed and gradual. These factors should help stabilise sentiment. We see Asian credit markets as a relative safe haven among emerging markets.
Razia Khan, Chief Economist, Africa
Africa is vulnerable
The real economy effects of Brexit are difficult to estimate at the outset. Already, countries such as Kenya have expressed concern over the potential need to renegotiate trade agreements. While existing trade agreements are with the EU, in the future new trade deals with the UK may need to be secured. This process is many years away, and does not pose an immediate risk. However, Kenya’s situation is likely to be replicated on a case-by-case basis with many other African economies, raising uncertainty and potential costs, and dampening current investment in key export sectors.
Sub-Saharan Africa (SSA), with its already-weak share of intra-regional growth, is the most vulnerable. Efforts to foster greater trade regionalisation within SSA, a process that was facilitated by securing trade agreements with the EU, may also suffer some setback given the new costs involved.
We expect more vulnerability in Africa – especially for countries that are planning bond issuance – as financing conditions are likely to tighten further in an environment of deteriorating risk appetite. The issuers that might be most vulnerable are those where there is a need for imminent refinancing and/or repayment of maturing external debt (Ghana), or require sizeable borrowing to support counter-cyclical infrastructure spending (Nigeria). If plans for increased SSA issuance are scaled back, forcing a more rapid primary fiscal adjustment with cuts to capital expenditure, the negative growth implications of Brexit on SSA markets are likely to be seen upfront.