Brexit unlikely to cause global recession

People take part in a Brexit referendum anti leave result demonstration in Trafalgar Square, central London Britain, on June 28. PHOTO: EPA

The Brexit vote has caused widespread financial market turmoil, but a British exit from the European Union (EU) is unlikely to cause a global recession, economists say.

However, investors should brace for more volatility, and the pound is expected to weaken further.

Previous crises - such as the Asian financial crisis and euro area recession in 2011 - led to sharp asset price declines in affected regions but had minimal impact on global growth, noted Citi Private Bank global chief investment strategist Steven Wieting at a briefing yesterday.

"It's early to argue that Brexit will cause a break-up of the euro zone or a global downturn," he said.

However, the "political quagmire" in Britain means that investors should be more cautious when it comes to putting money there.

"As investors, we think we should be emphasising parts of the world where assets have been beaten down in sympathy but have very little connection (to Brexit)," he said.

Mr Ken Peng, Citi Private Bank's Asia-Pacific investment strategist, noted that while direct trade links between Britain and Asia are fairly limited - dampening the immediate impact of Brexit on the region - the outcome of the referendum is "likely to support the rise of protectionism and anti-globalisation".

That might weigh slightly on growth in Asia, he added. On the flip side, Asia might become more attractive to investors shunning new investments in Europe, said Mr Peng.

The Brexit volatility has also removed some uncertainty over prospective United States rate hikes. Rates are now expected to remain low for longer, giving policymakers in Asia more room to support their economies, he noted.

Bank of Singapore chief economist Richard Jerram noted that markets are now more worried about "existential threats" facing the EU.

"The UK... did not adopt the euro as its currency. Exit for a euro zone member would be much more difficult and disruptive.

"Perhaps a more serious problem is the implications for the single currency... It is hard to see European integration moving forward in the current environment. (This) points towards a cautious investment stance, but not an overly negative one."

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A version of this article appeared in the print edition of The Straits Times on July 02, 2016, with the headline Brexit unlikely to cause global recession. Subscribe