Brexit makes a global recession more likely


I have been warning you for months now about the economic slowdown in China, China economic news: Asian indicators likely to confirm slowdown continues, and uncertainty over the pending Brexit vote in Britain.

heston-beachAs I was streaming the BBC News election coverage last night, I was reminded of George Taylor (Charlton Heston) in this famous scene from Planet of the Apes (1968): “We finally really did it. You Maniacs! You blew it up! Ah, damn you! God damn you all to hell!”

As I was watching returns, “the British pound fell more than 10 percent Thursday night, reaching $1.34 per pound, after midnight Eastern time, a stunning decline for a rich country’s currency in a single day.” The stunning collapse of the British pound, in charts.

When it became clear that “Leave” the EU was going to win, the next dominoes to fall were Prime Minister David Cameron announcing that he would resign in October, and the global markets responding with steep declines. Britain’s shock vote brings swift consequences as leader to resign, markets plunge:

A day after British voters defied widespread warnings of economic and political peril should they cut ties with the European Union, the country reckoned with the consequences as markets tanked across the globe, the prime minister said he would resign and the United Kingdom felt the renewed pressure of a breakup.

Brexit resultsThe cascading developments, all within hours of the result of a deeply polarizing referendum, reflected a country shocked by its own decision.

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[I]n the short term, the pessimistic view appeared to be winning out Friday as the country endured layer upon layer of self-inflicted turmoil — and a sudden question over who would lead Britain at a crucial moment.

With Britain still absorbing the dawn news that the country had voted by a margin of 52 percent to 48 percent to withdraw from the E.U., an emotional Prime Minister David Cameron appeared in front of 10 Downing Street on Friday and said he would step down after championing a failed campaign.

He promised to remain as a caretaker through the summer but said he wanted Britain to have a new prime minister by early October.

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Within hours, it became clear that whoever does the steering will have to fight to keep the United Kingdom from falling apart. Nicola Sturgeon, the leader in pro-E.U. Scotland, said she would push for a new independence referendum.

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Nationalists in Northern Ireland — another area that favored remaining in the E.U. — echoed those calls, demanding a vote on Irish reunification.

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As the political fallout emerged, plummeting markets made for a grim economic backdrop. The pound at one point fell to its lowest level against the dollar since 1985, before recovering modestly. Shares dropped from Tokyo to New York, with British markets hit particularly hard.

The market gyrations prompted Bank of England Governor Mark Carney to try to calm investors with a statement asserting that the bank was “well prepared” for the referendum’s outcome. The central bank, Carney said, was ready to intervene to prop up the economy.

Friday has been marked by headlines such as these: Stocks Tumble as Uncertainty Reigns; Turbulence and Uncertainty for the Market After ‘Brexit’; Major U.S. stock indexes close down sharply; ‘Brexit’ Hits U.S. Stock Market Harder Than an Election; and Five alarming immediate reactions to Brexit from the markets.

And this headline: Dow drops more than 600 points as Brexit raises risk of global recession:

brexit-hp-01The risk of another global recession escalated Friday after Britain’s stunning decision to leave the European Union plunged financial markets into free fall and tested the strength of the safeguards put in place since the last downturn seven years ago.

Wall Street was slammed from the moment trading opened, with the Dow Jones industrial average dropping more than 500 points within minutes. Though it pared those losses over the morning, it dropped again by afternoon and had lost 609 points at close, down 3.4 percent. The broader Standard & Poor’s 500-stock index closed down 3.6 percent, and the tech-heavy Nasdaq composite index suffered a 200-point loss, closing down more than 4 percent.

The gut-wrenching moves were the latest sign of panic that began when the results of Britain’s Thursday referendum began to trickle in overnight. Japan’s Nikkei index temporarily halted futures trading amid the sweeping global selloff and closed down 8 percent. The turmoil then hit European stock markets, with France’s major index also dropping 8 percent while Germany’s fell nearly 7 percent. The London-based FTSE 100 initially plummeted nearly 9 percent but ended the day with a 3 percent decline.

International policymakers have long warned that the sluggish recovery from the Great Recession has left the world economy more vulnerable to another downturn. Recurring crises over government debt in Europe, the bumpy slowdown China and the collapse in oil prices have already battered prospects for global growth. Britain’s exit from the E.U. — popularly known as Brexit — could prove to be the final straw, experts said.

“We think the time has come to consider that a financial market crash today may push a world economy teetering on the verge of a contraction over the edge,” said Carl Weinberg, chief economist at High Frequency Economics.

Though international policymakers acknowledged the Brexit vote carried “adverse implications for financial and economic stability,” they expressed confidence in the health of the banking system. In a joint statement, the Group of Seven finance ministers and central bankers said they would work together to ensure that markets continued to function smoothly.

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In the United States, the fallout from Britain’s decision is likely to keep the economy at stall speed this year but reduce growth as much as 0.6 percent next year, analysts at Morgan Stanley estimated. The dollar spiked nearly 2 percent against a basket of currencies Friday, though it remains below this year’s peak. That makes it more expensive to export American goods, and the relative strength of the dollar has been weighing on the U.S. recovery over the past two years.

Beyond the immediate financial volatility, Brexit unleashed fresh uncertainty over the future of the U.K. economy and its relationship with the rest of the world. Many analysts predicted that Britain’s economy could contract if businesses withhold investment and wary households rein in spending until a new fiscal order is established. S&P warned that it could downgrade Britain’s credit rating “by more than one notch” after the vote.

The repercussions of Britain’s decision will affect trade and capital flows as companies and investors rethink the country’s long-term stability. The Psychological Impact of Britain’s Vote. Britain’s vote to depart leaves the EU bloc  with reduced influence and greater tensions. British exit from the E.U. sets up a European crisis of diminished power; Why Brexit is worse for Europe than Britain.

It is important to keep in mind that Britons were warned of the economic consequences repeatedly, and yet they still voted for “Leave” anyway. The economic consequences to Britain are self-inflicted, but selfishly, their vote will affect the global economy as well.

(Of course, it is an election year here in America, so all you are going to hear is that”It’s Obama’s fault” from Tea-Publicans, and their echo chamber in the “lamestream” media.)

Not surprisingly, there is some buyer’s remorse today. Alarmed Britons Ask Pollsters: Why Didn’t You Warn Us? (they did). Thousands of Britons jumped on Twitter to express their sorrow and to disassociate themselves from the majority who ticked “leave” instead of “remain.” Heartbroken Brits react to Brexit result with #NotMyVote hashtag.

Just like Charlton Heston in Planet of the Apes: “We finally really did it. You Maniacs! You blew it up! Ah, damn you! God damn you all to hell!”


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