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The Effects of Brexit – So Far

by Bruce Haring

It’s been a month and a half since Brexit — Britain’s official exit from the European Union.  When the ballots were initially counted (with Brexit winning by a vote of 52% in favor of leaving to 48% wanting to remain) the world watched somewhat warily — wondering what would happen next.  And how this bold — and slightly shocking move — was going to affect the rest of us.

World markets predictably took a dive in the first week, but seem to have steadied since then.  But that doesn’t mean that everything is back to normal.  The truth is there’s going to (have to be) a new normal.  So what’s happened so far — and what do we expect to come?

In addition to that initial market slump, one of the first fallouts from the vote was the resignation of Prime Minister David Cameron.  Although many expected former London Mayor and Brexit supporter Boris Johnson to succeed Cameron as PM, he surprised his countrymen by declining to run for the position.  Instead, Conservative Party leader Theresa May took over the reins.  Although squarely on the “Remain” side of the issue, she’s vowed to help Britain establish a “strong, new, positive vision for the future,” stressing that she’ll be putting her own views aside and moving forward with Brexit.  That means no second vote and no back-door entry back into the EU.

The “exit” part of  “Brexit” may give world onlookers the wrong idea.  It is not an exit in the typical sense of the word.  Unlike an exit from a building where you are inside of it and then you aren’t, this exit is going to take time — a significant amount of it.  Brexit Secretary David Davis told the BBC that Britain might be able to “formally sever its relationship with the EU” by the end of 2018.  Chancellor Philip Hammond says it could take up to six years to finalize.

What else?  Well, on the bright side, the BBC reported that the country’s retail sales were up in July — in the wake of the Brexit vote.

But overall, Britain has definitely suffered some financial ill effects in the aftermath.  The value of British pound (which used to be roughly double the American dollar) has fallen to $1.29 as of this writing — with some experts predicting that it will reach parity with our dollar by the end of the year.  And it’s losing ground against the Euro as well.  Great news for American and European tourists — not so great for the Brits.

That, coupled with the market instability, led Standard & Poor’s to strip Britain of its AAA credit rating, as investors are left wondering what will happen with the UK’s financial institutions and international business dealings.

As a result of all that, goods such as food and clothing that are imported to the UK are likely to become more expensive for the locals.

In a move to help stimulate the economy, The Bank of England (or central bank) just cut interest rates by 0.25 percent — the first cut in seven years.  The bad news?  With interest rates so low, banks will have a harder time making money off their bank loans, and bank patrons will see little growth in their accounts at such a small interest rate.

And business activity has already weakened, indicating GDP growth is likely to be slow the rest of 2016.  Even worse, the National Institute for Social and Economic Research has projected a 50 percent chance of a recession for the UK in the next year and a half.

The central bank’s analysis of the possible economic fallout from Brexit, has resulted in these predictions:

  • A reduction in growth. Productivity could be 2.5 percent less by the end of 2018 — amounting to as much as £45 billion pounds.
  • Prices are predicted to rise by almost a full two percent to reach 2.4%.
  • Higher unemployment. As many as 250,000 people may lose their jobs in the next 2½ years.

The good news from the Bank of England is:

  • They will be infusing £70 billion into the British economy by printing money that will be used to buy bonds.
  • A £100 billion funding program will be introduced to keep banks solvent in light of the low interest rates.
  • And those low interest rates will be a boon to homeowners and homebuyers, as well as businesses looking to borrow funds.

While the effects have been relatively mild so far for most Americans, it still remains to be seen how — and when — these changes might affect the US and global economy.  So stay tuned.







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