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With the vote by Britons to exit the European Union (EU), the likelihood of additional anti-globalization incidents, given similar movements across developed economies, appears higher. We expect at minimum a minor recession in the U.K. will emerge, which is in line with consensus estimates of a U.K. gross domestic product growth decline. The largest determinant for a potential minor recession will come from gross fixed investment. In 2015, U.K. percentage growth in gross fixed investment was 4.1 percent, but Consensus Economics Inc., which surveyed U.K. economists for this forecast, expects gross fixed investment to decline to -1.6 percent by 2017 on the Brexit.
The vote to leave the EU outcome sparked significant volatility in foreign exchange where the British pound plunged about 12 percent to $1.32 against the U.S. dollar, its lowest level in more than 30 years. The euro fell by about 4.5 percent to $1.09 before stabilizing.
Are there positives in the long-term for the U.K.? Pro Brexit campaigners argued it provides more budgetary savings, deregulatory policies and immigration control. If achieved, these positives are likely to take several years to come to fruition.
Are there positives for eurozone? Possibly. Companies may choose to migrate headquarters from London to European cities. Certainly the U.K. service sector, such as financial companies, will be likely to move portions of their business to EU nations. Despite these positives, the rise in political uncertainty and potential for other countries to hold referendums on EU membership may cause tightening financial conditions.
Aside from Central Europe, which has some trade links and fiscal transfers with the U.K., the exit vote will largely have a minimal and indirect impact on emerging markets. More broadly, global financial liquidity is a positive factor for emerging market countries, as six of the world’s largest central banks have committed to bolstering liquidity in the global system.
Finally, we will continue to be vigilant in our efforts to monitor global reactions to the vote, while at the same time taking the prudent step to review the fundamentals of the countries and companies in which we invest.