Brexit’s Probable Aftermath For The US & EU Economy

Brexit’s Probable Aftermath For The US & EU Economy by Kenny Simon

The puzzle that was surrounding Brexit looks very similar to the level of suspense from soccer fans, just before the last goal that decides the winner of the World Cup. However, the consequences or after effect onto the people and their lives are what would differentiate an event like the ‘Brexit’ to other ‘cheer and cry’ occasions. The reason is; the Brexit, for example, would emanate a greater influence on the outcome since it meddles with the future wellbeing of its citizens particularly, their children’s future, the country’s economy, geopolitical security status as well as the lifeline of its’ locally owned businesses.

Just by zooming into what has happened in the UK, the drop of a ‘Brexit’ pebble into the ocean of financial markets has begun to form a ripple affect mainly for the world’s biggest economy as well as the economy of the biggest monetary union, the Euro zone.

Brexit – Possible Percussion to the US Economy

The exact size of the impact on the U.S. economy might be unclear but for sure, a significant volatility and uncertainty that is prolonged over time would very likely fuel chaos in the U.S. financial markets. Panicky investors would pull their investments out of both U.K. and European markets in order to run towards the safety of U.S. assets. This would then result in the freefall of both the pound and the euro causing the dollar to rally, further damaging demand for US exports.

The problem with a possible US inflation is that the US policymakers’ maybe contemplating on purposely allowing inflation to reach skywards above official targets as this is what the International Monetary Fund has recommended to avoid disinflation. This may spell out further disaster to the US economy since the occurrence of inflation cannot be completely avoided.

In politics, the next U.S. president will inherit the consequences of the Brexit and could you imagine if Trump wins, wouldn’t it be adding onto the total mess? Consequently, whether it be Trump or Hilary, either one would have to strategize in order to navigate the evolving relationship between the European Union and the United Kingdom. The other burgeoning question is; will London be pushing for a free-trade deal with the United States in order to secure and benefit from the exports of its key consumer market?

Globally, more bilateral trade deals are likely to be forged as larger multilateral trade agreements run into multi-faceted complications. Through the media, the U.S. economy seemed to be relatively ‘healthy’ or said to be severed from a trade standpoint, but most probably still be impacted by deflation in Europe via its’ existing financial and economic ties.

The prolonged uncertainty triggered by the Brexit may have safeguarded the U.S. Federal Reserve from increasing its interest rates for the remainder of the year perhaps nothing sooner than sometime in 2017. On the contrary, markets are factoring in an increasing likelihood of an interest rate cut instead at least by the end of this year. A current retreat to financial havens and a part from precious metals, the dollar, may still be one of the options, but this may dwindle the export numbers.

Possible Percussion to the EU Economy

It does look like there is a possibility for the British economy to be hit further while the GBP and the stock markets vacillate due to acute uncertainty, as more investment flees out of the UK and companies relocating to continental Europe.

Due to a potential political turmoil in the UK, most likely there will be either a sort of lockdown or ironic decisions in all bilateral trade agreement as well between the UK and the EU. This could very well be a catalyst to the spark of an economic recession not only in the UK but a domino’s affect to all European countries.

The weakest link so as to speak is the UK, and with renewed talk of secession in Scotland, will brew yet another source of political uncertainty. If the United Kingdom loses access to the European common market, its main trade partners in the European Union such as Ireland, the Netherlands, and Belgium would feel the agony. Consequently, there is a possibility of expediting a free-trade agreement between Brussels and London. Should the party fail to agree on a replacement for Cameron, early elections could be triggered, and by then the mood on Brexit could shift depending on the severity of its’ economic impact.

Numerous experts have expressed their opinion saying that there would be manageable negatives for the euro zone but coupled with either a trade impact, a financial flight to safety or uncertainty leading to tighter financial conditions and postponed investment. EU might revise down its 2017 forecast for GDP 1.00 percent from the current 1.6 percent.  Other members will have to fill in at least some of the shortfall from a lack of UK’s contributions.  Germany, the EU’s largest member, would inevitably have to provide the extra cash, approximately 2.5 billion euros.

Conclusion

Over the long run, the main effect of Brexit whether for the EU as a whole or the US economy, it most probably be geopolitically influenced but impacting an array of areas including the global economy, bilateral trade partnerships, international affairs among leaders as well as Britain’s political framework. A Britain-less European Union will be missing a sizable, market-friendly member, potentially shifting the balance of power in within the EU bloc to the more nationalist economies in the south. This could potentially intensify tension between Northern and Southern Europe, as one of the ‘hot topics’ currently are debates like the Schengen Agreement, following its’ management of the Eurozone.

The European Union without the United Kingdom will also be less relevant at the international level as the EU is about to lose one of its few members that have a truly global presence militarily, diplomatically and economically. By the time London and Brussels end the negotiations over their disconnection, the EU zone may begin to look very different from what we know it as today. For the global economy as a whole, Brexit would most likely be radiating the aura of prolonged uncertainty whether to the countries directly involved or to current partners dwelling onto the risks ahead due to Britain’s decision.

About Kenny Simon:

Kenny Simon is an FX trader and educator that took the initial ideas of Geometric Trading and further improved them by combining with Fibonacci Ratios and background in Psychology studies.

Kenny Simon is a Certified Professional Business Coach (iPMA).