US economy

How Brexit Is Invading the U.S.

Before British citizens voted a few weeks ago on whether to remain in the 28-member European Union, the outcome was impossible to predict. The UK was a country almost evenly divided between those who wanted to remain (arguing that membership had economic advantages) and those who wanted to leave (arguing just the opposite, that EU membership would drain resources).

What Now?

Now that the Leave campaign has prevailed, the UK must invoke Article 50 of the EU’s Lisbon Treaty [in order to forge future relations with the EU and other trading partners] before an exit can be officiated, after which there will be a two-year negotiation period to establish the terms. However, there are already many real effects occurring in the global marketplace, including the U.S.

U.S. Multinationals

For decades, U.S. corporations have invested in the world’s fifth-largest economy, viewing the UK as a gateway to the broader EU. But depending on the two-year negotiation period, these investments may dwindle if impediments to trade are imposed, hampering economic growth. JP Morgan and Ford both said they’ll review their investments in the UK, suggesting possible job relocations from the island nation to the EU.

Capital Flows

With so much ambiguity in UK securities and currencies, risk-averse investors have flocked to the safety of expensive U.S. Treasury bonds, bidding up the prices and reducing their yields (bond prices move inversely with yields). As such, the movement into greenback-denominated assets has caused the dollar to strengthen against the pound. While a strong dollar will benefit companies that export to the U.S., it will hurt profits of American businesses that export to the UK and euro-denominated nations. This could have an especially negative impact on the U.S. manufacturing sector, resulting in lost jobs.

Consumer Confidence

With all the volatility and uncertainty surrounding the state of the economy, consumers may tighten their spending habits. Any sign of bleakness can spiral into deferrals on large purchases, such as cars and houses—significant drivers of economic growth. And American businesses may take a similar route, trimming new projects and hires.

Federal Reserve

After China’s yuan devaluation wreaked havoc on global markets last year, the Federal Reserve was yet again forced to revise its rate-hike plan. Though many Fed committee members view the U.S. economy as strong, they are erring on the side of caution. Now with Brexit fears in the mix and other central banks (like those in China, Japan and Germany) reducing rates (even into negative territory), the conversation about the Fed has shifted from omitting a rate hike toward decreasing already-low rates. The idea is continued promotion of consumer and business spending so as to stimulate the marketplace. 

If leaving the EU is to be a success for the UK and its trade partners, the terms of the negotiation will have to be well articulated. One of the many issues to iron out is how to address the three million non-British EU citizens living in the UK, as well as Britons residing elsewhere throughout the EU. Certainly, the new prime minister, Theresa May, has her work cut out for her. But analyzing the potential uncertainties will be her most important job. During JP Morgan’s second quarter earnings call, chief executive Jamie Dimon indicated his expectation that the British economy will be hit “a little bit,” but it would be years before the bank could “adjust to the new reality.” As such, while most economists deem Brexit as a momentary gap in the path to further globalization, it will be years before its true outcome is known.