Economic Forecasts

Impact of the Brexit Vote: Scary But Mixed

A recession is unlikely, but a market correction is likely underway. Commodity prices will turn volatile. A bump for Trump?

With Britain set to quit the European Union, financial and political reverberations will spread across Europe, China and Japan as well as the U.S.: The global economy is in for some rough seas.

Here are our early answers to key questions.

What’s the impact on the U.S. economy? Brexit won’t spawn a recession in the U.S., but slower growth is inevitable as the dollar strengthens -- a damper on U.S. exports -- and as confidence flags for consumers and investors. Near term, firms pay put expansion plans on hold.

We see U.S. GDP growing by 1.8% this year, down a couple of ticks from an earlier forecast of 2%. For next year—2%, dialed back from 2.4%.

Will the Federal Reserve boost interest rates in the next six months, as has been widely expected? Almost certainly not. A hike would be seen as out of sync with other central banks—not the note that Fed Chair Janet Yellen and others want to send at this time.

What’s in store for the stock market? A bumpy ride, for sure. But there’s no need to panic, even if stocks enter a correction in the months ahead.

Commodities, especially industrial metals, are in for a rocky journey after pre-vote prices had seemingly hit bottom. Now, 5%-10% lower seems probable. Oil is likely to fall a bit. Gasoline prices, too. Gold, though, will trend higher.

Generally, markets are allergic to uncertainty, and there’ll be plenty to come.

Does the United Kingdom’s pending exit from the EU foretell a recession in Europe? Not this year, though growth in Europe was already an anemic 1.5%. But we see even odds of recession in 2017, again depending on how long instability lasts.

There’s no chance of a global recession. The world’s two largest economies—the U.S. and China—are seeing growth slow but will stay comparatively strong.

Will other EU members follow Britain out the door? Some will try, for sure. Most of the attention is focused on France and the Netherlands, where Eurosceptic forces are highly mobilized and trying to ride a wave of post-Brexit momentum to greater political success. Though the chances of these and other countries voting to leave the EU are real, chances of it happening are small.

Reform is at least as likely as retreat—a compromise that focuses on giving back some powers to the remaining 27 member states to appease them. There’s talk that the EU might urge the U.K. to reconsider. That’s unlikely, given that France and a few others are keen to move the divorce along quickly, fearing that a long good-bye would simply give anti-EU sentiment extra time to grow.

Other consequences? A trade deal between the U.S. and Europe is dead. Instead, European officials will focus on figuring out rules for trading with Britain.

Among the political ripples? Don’t be surprised if Donald Trump gets a boost in presidential polls in the coming weeks. The U.K. vote will embolden his supporters, and maybe attract others who like his call to keep out illegal immigrants and Muslims. A bump in his support could cause Republican officials to end their bid to replace him.

Most Popular

Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is heading back toward its March highs. What’s driving the resurgence, and will gas prices go down anytime soon?
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math
retirement planning

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math

The math isn’t as tough as you might think. It all starts with dividing your assets into three different buckets.
May 23, 2022

Recommended

What Is Preferred Stock, And Should I Buy It?
investing

What Is Preferred Stock, And Should I Buy It?

Thinking of adding preferred stock to your portfolio? Read on for a breakdown of the pros and cons to buying preferred shares.
May 26, 2022
Sometimes Renting Is Better Than Buying
investing

Sometimes Renting Is Better Than Buying

A home is an asset that generally appreciates in value, but it might not be the most optimal way to build wealth from an investment point of view.
May 25, 2022
Is Securities-Based Lending a Good Idea?
investing

Is Securities-Based Lending a Good Idea?

Securities-based lending may be a quick way to lay your hands on some cash, but you should be aware of the potential for risk.
May 25, 2022
Kiplinger's Economic Outlooks
Economic Forecasts

Kiplinger's Economic Outlooks

Regularly updated insights on the economy’s next moves.
May 23, 2022