Have global markets recovered from the Brexit effect?
In an interview with Wall Street Week on February 10, 2017, Atlas Merchant Capital CEO and former Barclays CEO Bob Diamond spoke about the impact of Brexit on global growth and the European markets. He also talked about the shift of regional banks to a more local focus rather than a global focus.
With the recent Parliamentary approval of the United Kingdom’s exit from the European Union on February 8, 2017, Prime Minister Theresa May will soon begin exit negotiations. Let’s take a look at the impact of Brexit on global growth.
Brexit’s impact on world markets
2016 experienced lackluster growth for many reasons, including the United Kingdom’s decision to move out of the European Union. The global markets (ACWI) (VXUS) reacted sharply, losing about $2 trillion on June 23 after the results of the vote were in.
The British pound (FXB) suffered a record one-day fall to a 31-year low as money shifted its base to safe havens such as gold and government bonds. The European market went into a selling spiral, as investors feared the pressure of more referendums would weaken the European Union bloc due to the British vote.
Let’s look at the economic forecast of the International Monetary Fund (or IMF) for the next couple of years, considering the impact of Brexit on the global markets.
Sluggish economic growth in 2016
Brexit caused a significant amount of economic, political, and financial uncertainty. As we can see in the above chart, the IMF’s global forecast for 2016 was cut by 0.1% to 3.4% in October 2016. The revised estimate was the same in January 2017. If not for the Brexit result, this estimate likely would have been slightly higher. Markets tend to follow global growth, and better growth leads to better returns for investors.
Expectations for global growth in 2017 and 2018 remain at 3.4% and 3.6%, respectively, as the expected impact of Brexit on the cyclical horizon is small for the world markets. Emerging markets are expected to provide support in 2017 and 2018, as economic activity is expected to gain strength in these regions.
Advanced economies’ projected growths were higher in January compared to October, mainly due to improved activity in the United States. The economic forecast for the United Kingdom has been revised upward by 0.4% to 1.5%, compared to 1.1% in October 2016. However, the 2018 forecast has fallen 0.3% to 1.4%, mainly due to consumers and companies lowering their spending over the next two years. The United Kingdom’s GDP growth forecast highlights a sharp slowdown in private consumption resulting from rising inflation due to a slump in the sterling since June 2016.
Global banking stocks including Citigroup (C), JPMorgan Chase (JPM), Goldman Sachs (GS), and Bank of America (BAC) fell on June 24, 2016, following the Brexit announcement. They’d rallied for the previous five weeks. However, the stocks regained ground as the US economic situation improved by the end of 2016.
According to Diamond, economic activity in the United Kingdom has been calm since it made its decision to opt out of the European Union.
Let’s look at the impact of the Brexit decision on the global stock markets.