USA TODAY International Edition
Impact of ‘ Brexit’ on U. S. economy likely modest
British decision to exit EU leaves winners, losers
“I don’t think it’s a big deal for the U. S. unless the ( European Union) splinters.” Mark Zandi, chief economist of Moody’s Analytics
The U. S. economy will likely take a modest hit from the United Kingdom’s vote last week to leave the European Union, but the episode is expected to produce some winners as well as losers.
The market turbulence set off by the referendum is prompting some businesses to rethink hiring and investment plans. And manufacturers that were starting to stabilize after a prolonged slump face a new potential setback. But homebuyers may be dealt a favorable drop in mortgage rates, while U. S. business and property owners welcome a possible fresh stream of foreign investment diverted from the U. K.
Overall, the negatives are expected to outweigh the positives. High Frequency Economics has trimmed its estimate for U. S. economic growth in the second half of 2016 to 2.3% from 2.5%. Goldman Sachs has cut its second- half forecast to 2% from 2.25%.
Yet the fallout from the socalled “Brexit” is a moving target. Stocks pared their losses Tuesday, though the Standard & Poor’s 500 remains nearly 4% off its pre- Brexit level and further turmoil may await.
“I don’t think it’s a big deal for the U. S. unless the ( European Union) splinters,” says Mark Zandi, chief economist of Moody’s Analytics.
Zandi notes the nearly doubledigit stock sell- off early in the year, triggered by China’s slowdown, was far more significant.
Here’s a breakdown of some losers and winners:
LOSERS
u Manufacturers. U. S. factories have been taking it on the chin for nearly two years with weakness abroad and a strong dollar hobbling their exports and low oil prices damping orders for the steel pipes used by drillers. Since January, the dollar has weakened while oil prices have risen, helping the sector regain its footing.
Since the vote, however, oil prices have dipped and the dollar has risen as much as 4% against a basket of currencies. “We were starting to see some signs of stability,” says Chad Moutray, chief economist of the National Association of Manufacturers. “This is a fly in the ointment.”
The U. K. accounts for only 4% of U. S. exports and 0.5% of U. S.
The WASHINGTON surprise vote by Britain to exit the European Union has hammered bank stocks, but the regulations put into place after the financial crisis of 2008 are proving their worth in shielding the banking system from serious disruption, let alone collapse.
U. S. banks, including those with extensive international operations, are weathering the crisis relatively well. Even British banks, which have in some cases lost more than a quarter of their value on the stock market, are in a more stable position as a result of reforms introduced in the wake of the financial crisis.
Britain’s finance minister, Chancellor of the Exchequer George Osborne, reassured markets this week with the affirmation that capital requirements for British banks were “10 times what they were,” even though he acknowledged market volatility likely would continue.
Bank shares began bouncing back Tuesday as investors realized the sell- off may have been overdone.
In the U. S., the Federal Reserve last week affirmed the country’s biggest banks are in better position than ever to survive market conditions much more severe than those resulting from the British vote.
“The nation’s largest bank holding companies continue to build their capital levels and improve their credit quality, strengthening their ability to lend to households and businesses during a severe recession,” the Fed said in releasing partial results of this year’s stress tests for the 33 biggest banks.
The stress test — which analyzes the impact of various disaster scenarios on banks’ balance sheets — is one of the measures introduced by the Dodd- Frank financial reform act. The banks’ ability to pass the tests, in turn, is due in large part to other Dodd- Frank reforms, including higher capital requirements and restrictions on speculative activities.
A second report on the stress tests with a more detailed view of individual banks’ plans for dividends and capital is due out Wednesday and is expected to give a green light for megabanks such as JPMorgan Chase, Bank of America and Citigroup to boost payouts.
These were precisely the banks hardest hit by the British referendum result because of the challenges they face with their London- based European operations. These banks may have to relocate numerous activities and thousands of employees if Britain no longer keeps its “passport” to offer financial services throughout the European Union.
But their performance in the stress tests, analysts argue, actually make these banks sound investments since the scenarios envisaged in the stress tests are so much more severe than anything “Brexit” has brought so far.
Another factor affecting banks as a result of Brexit is that it will likely encourage the Fed to keep interest rates low longer than it might have otherwise. Uncertain economic performance already had prompted Fed policymakers to slow their timetable for raising rates after a minimal hike in December marked the first time in a decade it had increased rates.
Now, many Fed watchers anticipate the Fed won’t raise rates again until sometime next year. Low interest rates, as a rule, reduce bank profits. There are other clouds on the banking horizon. The sharp drop in Italian bank shares following the Brexit vote prompted the Italian government to talk about a $ 44 billion bailout of the sector.
Other European banks remain in far worse shape than their U. S. counterparts, with insufficient capital and massive portfolios of bad loans. Ironically, one of the weakest is Germany’s largest bank, Deutsche Bank, which has dropped more than 50% in value over the past year. Frankfurt, where the bank is headquartered and the largest financial services center on the continent, is set to be the biggest beneficiary if activities are forced out of London.
Global banks remain interconnected so that a failure in Italy or Germany would have immediate repercussions on banks elsewhere. But the new restrictions on speculative activities, and especially derivatives, make a chain reaction credit crisis like that which occurred when Lehman Brothers collapsed in 2008 much less likely.
Perhaps the main lesson to draw from the market reaction to Brexit is that banks remain the most vulnerable sector in the event of economic shocks and the most sensitive barometer to impending threats.
The quick recovery in this case, however, testifies to the effectiveness of new regulations and validates the emphasis on special regulatory treatment for this sector.