Postcards are seen outside a news agent in London on June 24, 2016.LEON NEAL/AFP / Getty Images
After Britain's vote to leave the European Union, can the world's largest economy keep calm and carry on? Most economists say yes – with a few caveats.
Last month's surprise referendum result in Britain sent panic coursing through financial markets. Investors fled stocks around the globe, dumped the British pound and scrambled to buy assets viewed as safe havens.
But while the vote for Brexit carries major consequences for the British economy, the same is not likely true for the United States.
In the wake of the referendum, economists have made only modest changes in their forecasts for the U.S. economy, slightly downgrading their predictions for the rate of growth in the near future. Toronto-Dominion Bank pared its forecast for this year's U.S. GDP growth from 1.9 per cent to 1.8 per cent; Goldman Sachs Group Inc. trimmed its figure for the second half of 2016 from 2.25 per cent to 2 per cent.
"I don't think it's a big deal for the U.S. economy, short term or long run," said Mark Zandi, chief economist at Moody's Analytics. "The only caveat would be if Brexit becomes a catalyst for a broader fracturing of Europe."
Others were less sanguine, noting that the Brexit vote means both Britain and Europe are heading into uncharted waters. "Given the fluidity of the current situation, it's not clear what the effects are going to be," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank in New York. "I don't think anybody knows."
Even if Britain's economy tumbles into recession, that's unlikely to have a significant effect on the United States. As major economies go, the United States is not particularly dependent on trade, which accounts for about 30 per cent of overall output. Britain also ranks lower on the list of U.S. trading partners, representing 2.7 per cent of all goods traded (Canada, by comparison, accounts for 16.6 per cent).
One mechanism by which Britain's problems could cross the Atlantic is via financial markets themselves. U.S. stocks have largely recovered from their swan dive in the wake of the referendum, but turmoil could return. If such turbulence is prolonged, prices of risky assets such as corporate bonds will fall and their yields will rise. The result is a form of monetary tightening, as financial markets, rather than a central bank, become more restrictive of economic activity.
That moderate constriction in lending conditions for corporations is part of why economists have adjusted their forecasts downward. Another factor is a strong U.S. dollar. The greenback is likely to perform well in a context of global uncertainty. A robust currency in turn diminishes the competitiveness of U.S. exports, restraining economic output.
In some ways, the Brexit fallout holds a small silver lining for the U.S. economy. The recent investor race to safety has led to one destination in particular: U.S. government bonds. Early on Friday, the U.S. 10-year Treasury bond's price jumped, sending its yield to a historic low of 1.3784 per cent. Because consumer loans and mortgages are priced off government bonds, those borrowing rates will fall, which is potentially good news for consumers.
Still, the ratcheting up of uncertainty means that the U.S. Federal Reserve is likely to delay its plan to raise interest rates even longer than anticipated. Before the Brexit referendum, many economists believed the Fed would raise rates in September or December. Now futures trading indicates that investors don't think a rate hike will happen until 2017 at the earliest.
On Friday, Stanley Fischer, vice-chair of the Fed, said in an interview with CNBC that it would take time to gauge the impact of the Brexit vote since exiting the European Union is a lengthy process. U.S. policy makers would like to know "how quickly the British economy reaches its new configuration," Mr. Fischer said, according to a report from Reuters. "And then there are concerns about implications of the British example for other countries."
Perhaps the biggest question mark for the U.S. economy following the Brexit vote is not, strictly speaking, economic. "Brexit wasn't expected by markets and that means you should expect the unexpected, including in the American election" in November, said Mr. Zandi of Moody's Analytics. And a shock outcome in that vote could open the door to a whole new world of uncertainty.