Vote adds another layer to global economic gloom

SINGAPORE — The addition of Brexit to weak jobs growth in the United States and subdued global economic fundamentals is likely to prompt the US Federal Reserve to hold back on raising interest rates, but beyond that, the direct economic impact is likely to be modest although protectionist sentiment may grow.

As Deputy Prime Minister Tharman Shanmugaratnam said in his Facebook post: “It will take some time to draw the full lessons of the vote. The big issues are not about financial markets or economics. The markets will react negatively, and overshoot, but this will not be like 2008 when the house came down.”

Global economic fundamentals were already weak ahead of the Brexit vote, with weak jobs reports preventing the US Federal Reserve from going ahead with an anticipated rate hike in June and the world’s second-biggest economy — China — experiencing a slowdown in economic growth. Business sentiment has generally worsened overall, along with the world’s two prime economic driver countries. Now Brexit threatens to add another dimension.

While the world was stumped by the immediate knee-jerk reaction by the markets, the United Kingdom (UK) is bracing itself for the economic fallout from its decision to exit the European Union (EU) or “Brexit” — which threatens to impact it even more severely than others by sending them into recession.

Brexit should drive the UK economy into a technical recession in the second half of 2016 and in 2017 due to lower consumption and a fall in capital expenditure, Union Bancaire Privee (UBP) said in a note. It also expects the UK’s unemployment rate to increase by 1-1.5 percentage points from the current 5 per cent. The EU is the UK’s biggest trading partner and accounts for 49 per cent of trade, and the latter faces a decline in economic activity due to the loss of its trading privileges.

US investment bank JPMorgan Chase warned that it could relocate UK jobs abroad following Britain’s vote to leave the European Union but others such as Goldman Sachs, France’s Societe Generale and Italy’s Unicredit indicated that London is likely to remain an international financial centre. Apart from finance, other sectors expected to be affected are property, advertising and manufacturing.

Weighing on investment decisions will be the wait for the actual exit. The official exit is likely to be 2018, which will open up a period of tough and long negotiations with the EU, and other trading partners, on matters such as trade agreements.

Eurozone political impact greater than economic

The impact on the UK-less Eurozone economy is expected to be less pronounced, with UBP estimating a minus 0.2 percentage point per year effect over the next few years. It added that some countries — such as the Netherlands, Germany and Belgium — may be more exposed than others.

Mr Markus Kerber, president of the BDI German Industry Federation, said he expects a significant drop in trade with Britain in the coming months, adding that automotive, energy, telecoms, electronics, metal, retail and financial services sectors to be particularly affected. Rather, the fallout from the political sphere is expected to be greater as anti-EU protestors in countries such as Spain, Italy and the Netherlands become more influential. Their potential increase in influence carries the risk of further fragmentation of the EU.

Limited impact on Asia ex-China

The direct impact on Asian economies, apart from China, is likely to be curtailed due to limited bilateral trade and investment linkages.

As a percentage of GDP, exports to the UK range from a low 2-3 per cent for economies such as Hong Kong and Vietnam and an even lower 0.2-1 per cent for most of the rest, including Indonesia and Malaysia, OCBC Bank economist Wellian Wiranto estimated.

But for China, the impact could be more significant as it shared US$598 billion (S$806 billion) in trade with the EU last year, second only to the US. With slowing growth and significant capital outflows, China can be more vulnerable compared with other Asian states as the EU can lose a sixth of its economic output with the UK.

“The decision of leaving the EU has an impact on everything, and we believe all related parties must calm down and evaluate the situation,” Chinese Ministry of Foreign Affairs spokeswoman Hua Chunying said. WITH AGENCIES