Q&A: Brexit's Risks and Possibilities
The Brexit Is Not a Crisis
Cliff Waldman, director of economic studies for the MAPI Foundation, considers the Brexit “as fundamental a change in the Western economic order as we have seen since the end of the Cold War.” He recently recorded a presentation on the economic implications of this event to address the questions manufacturers are asking, review results of a MAPI survey, and analyze important impacts on the global outlook. After his presentation, Cliff answered questions from colleagues about how the UK will respond to various aspects of the separation; his answers are summarized below.
Cliff began by saying that economics won’t give us all the answers we’re looking for about understanding the implications of the Brexit, particularly because of the central importance of geopolitical factors. He doesn’t see the Brexit as a crisis; instead, it is a set of risks and possibilities emerging from changing relationships among the UK, EU, and U.S.
Based on early data, he says markets are seeing this as an interesting event, not a crisis. Because of ripple effects and geopolitical factors, the 10-year outcome of the Brexit will certainly deliver surprises that none of us can anticipate. For now, we’re seeing more economic uncertainty (and we already had too much) and there will likely be negative effects on capital spending, which is already weak.
A survey of 96 MAPI members revealed that most are not panicking—67% aren’t worried at all or are only slightly worried. A slight majority expect no negative effects on their exports to the UK. At least at this time, most don’t expect to significantly change their investment plans in the country, though much could change as the situation plays out.
Cliff noted that a recent Institute for Supply Management survey had similar findings. They found that most manufacturers expect only negligible impacts on their businesses; a small fraction predict positive impacts. Those predicting negative financial outcomes tended to cite dollar fluctuations as the cause.
Q&A: What Happens Next?
Below is a condensed and edited excerpt from the Q&A portion of Cliff’s presentation.
Will the UK be able to participate in the common market without fully cooperating with the regulatory regime?
Cliff doubts it—you’re either in or you’re out. The UK will likely have to eventually form their own regulatory structure. If the UK plays it right, some industries might benefit from the separation. For example, the UK digital economy could step away from the EU’s onerous regulatory relationship with data and data privacy. They will have the opportunity to develop a more modern framework for regulating data.
What are the main transmission mechanisms for the Brexit to affect the UK economy and the eurozone?
Supply chains are a major mechanism—it’s easy for commentators to think in terms of cross-border trade without seeing how goods producers are forming sophisticated supply chains. For MAPI members, the question is whether the UK will be the pivot point for a profitable supply chain into the EU. Cliff thinks we’re past the point where we’ll have financial transmission mechanisms. Through supply chains, however, we could have investment transmission mechanisms, in which an investment drop in the UK through the supply chain transmission channel could cause an investment drop in certain parts of the EU.
One argument is that declines in the pound exchange rate and interest rates could mean that monetary policy will offset the effects of the Brexit on the UK economy. What’s your take?
Cliff is skeptical about this idea since pre-Brexit, we were already living in a world of remarkable global monetary policy accommodation, with negative interest rates, and thus he’s not sure that any further action will matter much. The Bank of England has policy interest rates set at a 300-year low. Monetary policy might not have the capacity to neutralize anything.
Commodity prices have dropped dramatically since the Brexit, especially oil. Does that suggest that the global outlook will be affected?
Cliff sees the slide in oil as one of the most worrisome factors for the global outlook. The volatility, particularly in oil, has been so great in recent years, however, that it’s dangerous to read any of these changes as a clear signal. Many oil commentators think that it’s a supply issue, not a global outlook issue; Cliff thinks it might be a combination of both.
How will this affect London’s position as an international banking center, especially for all of Europe?
Cliff predicts that London will lose reams of financial services jobs and diminish as a European financial center. He wonders how many people thought through this aspect before voting; it will probably be one of the Brexit’s most harmful effects on the UK economy. London is a powerful city, though, and the UK is rising as a geopolitical player—in the fight against terrorism, a bulwark against Russia, etc.—and thus there is probably more nonfinancial strength in the London economy in terms of its position in the world than people think. Cliff noted that there’s more to London than finance.
Is it possible that parts of the United Kingdom will join the European Union?
Cliff thinks it’s possible, as the integrity of the UK is uncertain. He says another referendum from Scotland is the thing to look for; this could exacerbate existing tensions. He doesn’t, however, foresee as much of a break within UK cohesion as some people think. In Prime Minister May we have a moderate conservative; in her first speech, she said that Brexit is Brexit and they will make a success of it. Those factors eliminate some uncertainty and at least held off the possibility of intra-UK tensions that might lead to another referendum. Cliff sees May’s statement that there’s no going back on the Brexit as a smart decision that eliminated at least some short-term uncertainty for the UK.
More About the Brexit
For more on MAPI’s survey of members and Cliff’s analysis of the complex trade and investment relationships that will be shaped by the Brexit, watch Cliff’s presentation. Then join us for his recorded webinar on the global outlook, in which he will take a look at how the separation is affecting major economies.