The decision last week by UK voters to pull the country out of the European Union has indirect implications for the US economy, both near-term and in the longer run. Although the Brexit outcome does not involve the US directly, Dun & Bradstreet is advising customers and clients about possible implications.
The immediate effect, already evident, has been a spike in volatility in US markets as uncertainty remains elevated. The CBOE Volatility Index (VIX), measuring stock market volatility and informally called “the fear index,” jumped up to a three-month high immediately after the Brexit result was announced. Heavy losses in stock markets across the globe in the following two days reflected how shaken investors were initially; stocks have stabilized a bit since then as the immediate shock subsided. Business sentiment will likely be downbeat over the next few days as companies take stock of how this affects them.
There are two other channels through which Brexit aftershocks will continue to ripple through the US economy. In the near term, the US dollar will appreciate measurably as global investors flock to safe-haven currencies like the dollar and the yen. This will make US exports costlier for foreigners and imports cheaper, acting as a headwind to growth. This was the case for most of 2015; the dollar had retreated only recently from its mid-January peak against a basket of foreign currencies.
A strong dollar also weighs on corporate profits of US multinational companies, a downside risk to business investment in the US. Customers with a heavy exposure to foreign markets or above-average dependence on FX earnings (manufacturing, oil and gas) will therefore need to be especially careful about their near-term business strategy.
Beyond the near term, patterns in global trade and investment flows will change as the UK begins the process of actual exit from the EU. Global growth is likely to slow during the transition process, a negative for the US economy as well. However, there will be new opportunities also for the US to expand trade and forge new alliances that will require a well-calibrated policy response from the government.
Brexit also has significant policy implications for the US. The US Federal Reserve will turn more cautious in the wake of the market volatility and refrain from making any changes to the policy interest rate until it feels confident that markets have calmed and stabilized to be able to absorb any policy change. Further, the appreciation of the dollar and the monetary loosening expected in the UK and the EU imply de facto tightening in monetary conditions in the US.
On June 24 the Fed pledged to provide dollar liquidity as it expects pressures in global funding markets. Finally, dollar strength will keep a lid on US domestic inflation, keeping it below the Fed’s target longer. Dun & Bradstreet has thus changed its baseline interest-rate forecast; we no longer expect the Fed to raise interest rates at its July meeting.
We forecast GDP growth of 1.8% in 2016, falling short of the 2% mark. Dun & Bradstreet’s proprietary leading indicator, the Small Business Health Index (SBHI), has been flat over the past three months, signaling a slow but steady US economy. Brexit and the uncertainty associated with its effects add downside to the outlook. D&B will continue to monitor the impact on the US and advise you as this fast-moving situation evolves.
Bodhi Ganguli is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in Short Hills, NJ, Bodhi covers sub-Saharan Africa as a contributor to D&B Macro Market/Country Insight Products. He is also a member of D&B’s US Economic Advisory Panel. He received his Ph.D. in economics from Rutgers University and his bachelor’s degree in economics from Presidency College, India.
Photo courtesy of the European Commission.