One week after British vote, markets take stock
NEW YORK — A week after Britain’s shocking vote to leave the European Union, markets seem to have pushed the pause button.
After a two-day spree of near panic selling that wiped out an unprecedented $3 trillion from global markets, investors, analysts and pundits in the U.S. and abroad spent the week following the vote collectively revising their knee-jerk reactions to what has become known as the Brexit vote.
Markets closed out the week just a hair below their pre-vote level, with the S&P 500 index rebounding from a 5.3 percent drop to finish just 10 points below where it started.
Here are five ways markets are rethinking the impact of the unprecedented move by an EU member to begin unravelling the nearly 60-yearold project to bring peace and prosperity to Europe.
European fallout
The impact will vary widely depending on your distance from the Brexit bomb’s crater.
Worst off, predictably, will be Britain. Its finance minister, George Osborne, warned Friday that the referendum is “likely to lead to a significant negative shock for the British economy.” The Institute of International Finance, a think tank for the banking industry, predicts Britain will slide into recession in the second half of this year.
Fallout in the eurozone will be less, but still significant. Brad Setser at the Council on Foreign Relations reckons that just the uncertainty over Britain’s departure from the trade block “will knock a cumulative half a percentage point off euro area growth over the next two years.”
The IIF, meanwhile, also predicts a hit to the 19 eurozone countries: It forecasts growth there will fall to 1.4 percent next year from 1.7 percent in 2016.
Global fallout
Outside Britain and the eurozone, a consensus is emerging that the damage will be contained.
While the direct impact on the U.S. of weaker economic growth in U.K. isn’t large — American exports to Britain account for only about 0.5 percent of U.S. GDP — the primary economic challenge is expected to be uncertainty.
“Only if we see some sort of “exit fever” spreading through other countries will the damage be severe” in the U.S., S&P Global Ratings says.
Ksenia Bushmeneva, an economist with TD Economics, predicted Britain’s departure from the EU would slow global growth by 0.2 percentage points next year to 3.2 percent. “The U.S. economy should be relatively well-insulated but it will not be completely immune,” Ksenia said.
S&P Global now expects U.S. real GDP to grow by 2 percent in 2016, versus its 2.3 percent forecast in March, and by 2.4 percent next year.
Interest rates
The amped-up dollar and the uncertainty that followed the British vote mean the Federal Reserve probably won’t raise American interest rates anytime soon, perhaps not until next year.