Britain’s unanticipated exit from the European Union has already been calamitous for the U.K.’s economy—the pound dropped to a 30-year low, while the euro dropped more than 3 percent against the dollar.
With our interconnected, global economy, it was inevitable that the reverberations of the exit would be felt around the world, and numbers out of the United States’ stock market clearly reflect this.
On Friday morning, the Dow Jones Industrial Average dipped 500 points, or 2.8 percent, while the S&P 500 dropped 2.9 percent and the Nasdaq, 3.4 percent.
According to USA Today, “Some $675 billion in U.S. market value had been erased in Friday’s selloff as of about noon.”
Stock markets in Japan, France, and Germany similarly fell. While this reaction isn’t unexpected, and some analysts believe the market is overreacting to the news, the long-term effects of the Brexit remain daunting and unknown.
Stock markets were anticipated to fluctuate, but the primary question on many minds is whether this will lead to a global recession. According to Matt Sherwood, head of investment strategy at Perpetual in Sydney, “Not only will the U.K. go into recession, Europe will follow suit.”
That is certainly a worst-case scenario, and Europe will feel the strongest ramifications of the Brexit; however, some speculate the outlook isn’t great for the U.S. either.
The LA Times reports that, “The hit to stocks means even Americans who have not been monitoring the Brexit vote will feel a pinch in their 401(k) plans. Consumer and business confidence…could also take a hit.
“For the U.S., one of the biggest risks comes in trade. With the dollar strengthening against the pound and the euro, American manufacturers will face greater challenges in selling goods abroad.”
In a list of Brexit risks that The Nation details, this rising dollar that could “[suppress] American exports” is a key factor to a potential U.S. recession. Renegotiation of trade agreements with Britain, now separate from our trade agreements with the EU, compounds the issue of making it more expensive to export goods.
While the U.S. has called both the EU and Britain “indispensable” trading partners, starting from scratch with Britain could reduce growth as much as 0.6 percent, according to the Washington Post.
The U.S. has already been facing a few months of weak job growth and stagnancy in recovery, so this shift in the composition of the EU comes at an inopportune time—even if U.S. stock markets recover quickly, the consequences on trade and investments could lead to lasting issues.
The Federal Reserve, which was hoping to increase interest rates in lieu of a two-year economic boost for the U.S., will likely now have to cut them in order to compensate for global risk.
The Leave campaign, so focused on touting the economic benefits of leaving the European Union, has ironically led to a global economic panic—and even those across the pond are suffering.
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