Brexit's Complex Impact on the Economy

The United Kingdom’s surprising June 23 referendum vote to leave the European Union caused dramatic short-term moves in global capital markets. Yet, less than a month after the historic vote on what we know as “Brexit,” much of the initial reaction across capital markets has reversed. 

As we state in the July edition of Business Conditions Monthly, which is out today, the Brexit vote is just the beginning of what is likely to be a multi-year process to disentangle the U.K. from the EU. That complicates the efforts of rest of the world, which is continuing to struggle to figure out how to reinvigorate global economic growth. In this month’s report, we take a closer look at some of the fallout from the vote and the anticipated Brexit.

For the United States, the threat to economic growth from Brexit is likely to be contained. Exports are a relatively small and declining share of the economy. The U.S. economy has shown in the past that it is resilient to shocks from abroad, and so far, there’s no evidence that Brexit will be any different.

Meanwhile, the latest reading of our Business-Cycle Conditions model, which is our data-driven barometer of the country’s economic health, came in at 46. That’s down slightly from a neutral 50 reading last month. Our model continues to bounce around in the 38 to 50 range, suggesting weakness and a somewhat elevated risk of recession. However, based on our model results and our assessment of other economic indicators, we do not judge that a recession is the most likely path in the near term.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.