Brexit pitches world into uncharted terrain

British flags hang from the ceiling of the popular British restaurant and grocery Tea & Sympathy in Manhattan on June 24, 2016 in New York City.
British flags hang from the ceiling of the popular British restaurant and grocery Tea & Sympathy in Manhattan on June 24, 2016 in New York City.PHOTO: AFP

PARIS (AFP) - Slowing growth, a return to protectionism, questioning of free trade agreements and doubts over the stability of the EU: the world economy is entering a period of deep uncertainty following Brexit.

"We are moving into completely uncharted territory where the only certainty will be uncertainty," said Jean-Michel Six, chief economist for Europe at SP Global Ratings.

Six suggests that the fallout from Brexit could sap growth in the eurozone in 2017 by 0.5 per cent.

Britain on Thursday voted by 52 per cent to 48 per cent for their country to leave the EU despite dire warnings from world leaders and economic experts.

Institutions such as the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) had warned in the months and weeks leading up to the ballot of the dangers for the world economy, especially elsewhere in Europe, should Brexit come to pass.

"A vote by the UK people to leave the EU would have some effect" even on the United States, the world's largest economy, IMF chief Christine Lagarde said in remarks ahead of the vote on Wednesday.

"How large those effects could be is debatable," she added, noting that a vote to leave would likely lead to a spike in the value of the dollar, hobbling the competitiveness of US exports.

European leaders and markets fear a domino effect as people across Europe lose faith in the supernational project.

Far-right leaders in France and the Netherlands - two founding members of the EU - have already called for their own referendums on quitting the bloc in the wake of Brexit.

Europe has until now failed to pick up the slack left by the flagging emerging economies that have propped up world growth since 2008, and Brexit is likely to inflict a further blow to confidence on the continent.

 
 
 
 

The British vote on Friday sent shockwaves as far as Mexico.

Just a few hours after the results emerged, the finance ministry there declared it would slash spending by US$1.68 billion (S$2.26 billion) in anticipation of an economic shock.

Finance ministers and central bank governors from the Group of Seven (G-7) nations also came together to warn of "adverse implications for financial stability" in the wake of the Leave campaign victory.

"An exit from the crisis and a sustained return to growth now seems to have been compromised after such a succession of events on the financial markets," said Christopher Dembik, an economist at Danish Saxo Bank.

The British vote increases risks for Europe.

"Before Brexit, the EU was seen as a centre of stability in the international system," said Thomas Gomart, director of the French Institute of International Relations.

"But with the Greek crisis, the migrant crisis, Brexit and the rise of populism, Europe is in the process of switching from a source of stability to source of international instability," he said.

Meanwhile, Ludovic Subran, chief economist at credit insurer Euler Hermes, said "the worst case scenario is happening", even if "it is not the Apocalypse".

He believes the weakening of the EU as a bloc will be felt quickly on the international level, pointing to the negotiation with the United States on a free trade deal, as well within the G7.

The situation could "encourage countries like China to establish direct bilateral relations with European countries" rather than negotiate with Brussels, Gomart said.

He believes the Brexit vote undermines the globalisation model.

"In reality, we're now more in a divergence of models, with probably with a return to protectionism" said Gomart.

"Already global trade has lagged global growth in recent years," noted former US treasury secretary Larry Summers.

Canadian asset managers Candriam didn't rule out Europe slumping into recession if after a few months "it becomes clear that European governments are unable to find an agreement in their negotiation with the UK and to agree on the need to support activity."

Meanwhile, US investment bank Goldman Sachs said it expects "the rest of the EU to reaffirm its desire to make the EU, including the Euro area, more workable" although it noted a lack of follow-up on previous reform pledges means "it is doubtful whether this will have much credibility in financial markets".

Nobel Prize-winning economist Paul Krugman used his New York Times blog to say that "the consequences will be bad, but not as bad as many are claiming."

Krugman argued that the seeds of economic uncertainty and political instability in Europe were sown long before the British vote to quit the Union.

"Brexit just brings to a head an abcess that would have burst fairly soon in any case," he wrote.