Brexit Impact on the US

We asked futurist Kevin Osborn to chime in on his thoughts about how Brexit could potentially impact the US economy. Here’s what he had to say:

brexitAlthough the global (and US) hysteria—whether apocalyptic or jubilant—about the Brexit vote on June 23 may be somewhat overblown (this is not the harbinger of a global economic collapse), Brexit should also be viewed as something more than just a tempest in a (British) teapot. The realization of Brexit will have consequences, both immediate and long-term, not only for the UK and the EU, but for the US and the rest of the global economy.

The consequence with the greatest short- and long-term impact will likely be the lingering global uncertainty engendered by the Brexit referendum—and uncertainty is seldom favorable to financial markets or economic indicators. With $588 billion invested in the UK, the US is the largest single investor in Britain—meaning that any economic repercussions of Brexit will almost definitely reach across the Atlantic. Volatility in the US and global stock markets can have a negative impact on pensions and other retirement funds that rely on equities as a significant part of their portfolios—and as a result, deliver a blow to the growing but still fragile confidence of US consumers.

The drawn-out consequences of Brexit will also likelyfurther slow already sluggish US economic growth. US economic growth has long been fueled by consumption. Yet stock market volatility, as noted above, tends to whittle away at consumer confidence and depress spending. Although buying BMW Minis and other goods imported from the UK (as well as Europe and elsewhere) will become cheaper as the value of the dollar rises compared to the pound and euro, increased spending on imports is not likely to make up for growing reluctance to spend. Slowing economic growth will not be confined to the US alone, of course: In its worst-case scenario, the IMF predicted that Brexit could reduce economic growth by up to 5.6% over the next three years.

The deceleration of economic growth will likely be exacerbated by Brexit-induced job losses and a hiring slowdown. Certainly, as the UK ceases to serve as the principal gateway to the EU market, many of the more than one million manufacturing and financial-service jobs held by US workers in the UK are at risk,. But the threat to jobs applies not only to multinationals who operate within the UK and banks and other financial-service providers who have established London as the base for their EU operations. US manufacturing companies that depend on exports for a significant portion of their sales will also likely slow hiring as the growing strength of the dollar progressively shrinks export markets.

The reduction of US exports, due to the rise of the dollar (and the falling of oil prices, which are traded in dollars), will itself be an almost-certain consequence of Brexit. (Oil prices have already dropped 6% in the week since Brexit passed.) While a stronger dollar—the dollar exchange rate for the British pound has reached a 31-year low in the wake of Brexit—will be welcomed by US tourists, it will hurt US exporters.

Although US exports to UK amounted to $56 billion in 2015, just 4% of all US exports, the strengthening of the dollar due to Brexit will impact US exports to all markets. Jim O’Sullivan of High Frequency Economics, for example, has lowered his forecast for US export growth in the second half of 2016 from 2.5% to just 1%. The decrease in exports—and the increase in imports as the dollar remains strong—will likely add slightly to the US trade deficit.

One of the most significant outcomes of the Brexit decision for the US, however, is the further delay of anticipated interest rate hikes, which had already been put on hold due to sluggish economic growth and slowing job gains. (Yields on Treasury notes are already at their lowest rate in four years.) While low rates are good for homeowners, they are bad for investors—and for consumption growth (and therefore overall US economic growth). Persistently low interest rates, coupled with low productivity levels and high debt (which is, of course, fueled by low interest rates) stifle economic growth—and Brexit has locked in these stifling trends, perhaps for years to come.

As the terms of the UK’s exit from the EU take shape over the next two years, multinationals will, of course, pay heed to their European operations, with many considering relocating from the UK to Dublin or mainland cities like Paris or Frankfurt. Yet, as PwC notes, since the impact of Brexit on global trade, economic growth, free cross-border movement of labor, credit availability, and currency valuations remain unknown, companies would be well-advised also to monitor, assess, and reassess these developments as they unfold.