Brad Plumer :
(From previous issue)
Scott Sumner: “The ultimate effect depends ENTIRELY on how the central banks react”
Scott Sumner, the director of the Program on Monetary Policy at the Mercatus Center at George Mason University, points to monetary policy as the key question:
At this point (midnight) the global economy has been hit by a negative monetary shock, one of the biggest in years. ….
I’d emphasize that this is an almost purely a monetary shock-in real terms it makes little difference whether the UK is in or out of the EU (especially in places like the US and Japan). It’s monetary. That means the ultimate effect depends ENTIRELY on how the central banks react. Do they show imagination and leadership, or . . . do they keep acting the way they’ve been acting since 2007. We won’t have to wait long for an answer. (Obviously the markets believe that the central banks will not rise to the occasion.)
The odds of a global recession in 2017 just increased, by at least a few percentage points (albeit still less than 50-50). I think this also makes it slightly more likely that Trump will win, although he’s clearly still the underdog.
Capital Economics: “Brexit is not a disaster for the world economy”
It’s worth noting that some analysts are more sanguine. On Friday, the British research consultancy Capital Economics circulated a note with this headline: “‘Brexit’ is not a disaster for the world economy.”
Before the vote, Capital Economics produced a paper that was somewhat less dire than other economic analyses out there. Their broad takeaway is that there will be a lot of turmoil for Britain, but the country will ultimately adjust. Some highlights:
It is highly probable that a favourable trade agreement would be reached after Brexit as there are advantages for both sides in continuing a close commercial arrangement. But the worst-case scenario, in which Britain faces tariffs under ‘most-favoured nation’ rules, is certainly no disaster. Exporters would face some additional costs, such as complying with the European Union’s rules of origin, if they were outside the single market. However, these factors would be an inconvenience rather than a major barrier to trade. …
Financial services have more to lose immediately after a European Union exit than most other sectors of the economy. Even in the best case, in which passporting rights were preserved, the United Kingdom would still lose influence over the single market’s rules. The City would probably be hurt in the short term, but it would not spell disaster. The City’s competitive advantage is founded on more than just unfettered access to the single market. A European Union exit would enable the United Kingdom to broker trade deals with emerging markets that could pay dividends for the financial services sector in the long run.
Concerns about a drying up of foreign direct investment if Britain votes to leave the European Union are somewhat overblown. Access to the single market is not the only reason that firms invest in Britain. Other advantages to investing here should ensure that foreign firms continue to want a foothold in the country. It is likely Britain would remain a haven for foreign direct investment flows even if it was outside of the European Union. Of course, we could see a period of weak foreign direct investment inflows as the United Kingdom’s new relationship is renegotiated. However, if Britain is able to obtain favourable terms, then foreign direct investment would probably recoup this lost ground.
(There are a whole lot of “if”s in that paper, but that’s one of the more optimistic cases around.)
(Concluded)
