How will Brexit Impact American Economy?
The United Kingdom’s surprise decision to leave the European Union (known as Brexit) has led to uncertainty and confusion in international financial and manufacturing sectors. How can American companies take advantage of new trade opportunities arising from Brexit while protecting their interests from potential economic downsides?
Leader of the United Kingdom Independence Party (UKIP), Nigel Farage talks to supporters as he campaigns for votes to leave the European Union in the referendum on May 25, 2016 in Bolton, England. Nigel Farage took his battle bus to Bolton encouraging British people to vote to leave the EU on 23rd June 2016. — Image by Christopher Furlong
What’s at Stake for American Economy Now That the UK Will be Leaving the European Union?
Let’s take a look at the impacts that Brexit will have on trade with various American industries.
Changes in Interest Rates and Currency Exchange Rates
In the short term, FUD (fear, uncertainty, and doubt) has taken hold, driving down the British Pound — which has, in turn, driven up the value of the US Dollar.
FUD makes American exports more expensive on world markets, so manufacturers who sell to overseas markets will have to adjust their currency exchange rate forecasts accordingly. Those American manufacturers dependent on British products will see a gain thanks to the lower Pound exchange rate.
What about Interest Rates in the Short Term?
Thanks to Brexit, it’s unlikely that American manufacturing companies will be facing an interest rate rise this fall. Janet Yellen, Chair of the US Federal Reserve, appears to have reversed earlier plans to raise US interest rates, due to the uncertain economy in Europe and predictions for a mild recession in Great Britain brought about by Brexit.
Will the US Experience a Slowdown or Mild-Recession as a Result of Brexit?
The preliminary employment numbers from June 2016 had economists concerned about an economic downturn in the US during the second half of 2016. However, news broke on Friday, August 5 that the US economy added 255,000 jobs during July, and earlier jobs figures were revised upwards, which has dispelled earlier concerns about an economic contraction. With US unemployment steady at 4.9%, we are very close to the figure — 4.6% unemployment — that many economists consider being the ‘full employment’ number.
If these strong employment numbers continue into the fall, it’s likely that the Fed will consider raising interest rates as we go into 2017.
Meanwhile, in Great Britain, the Bank of England is Fighting Off an Economic Slowdown
Canadian Mark Carney, who serves as Janet Yellen’s colleague as the Governor of the Bank of England, has been forced to address dismal leading economic indicators, such as the UK Markit Purchasing Managers’ Index (PMI) which dropped significantly in July. Economists are now predicting a mild recession in the UK in the second half of 2016.
On Thursday, August 4, Carney announced the Bank of England’s strategy to avoid a downturn. The Bank is cutting UK interest rates to 0.25% to stimulate demand; this will be accompanied by some ‘quantitative easing’ which will push more currency into the banking system. Worrisome for Carney are the UK’s public debt position (among the highest of industrialized countries) and their large, ongoing trade deficit ($191 billion USD in 2014).
Manufacturing companies that trade extensively with the UK will want to evaluate these changes and adjust their forecasts accordingly.
How Much Weight Does British Trade Have on the American Economy and Vice Versa?
If you are concerned about a British recession and how it might affect your manufacturing operations, it’s helpful to consider the relative size of our two economies.
The USA is Great Britain’s largest trading partner — in 2014, the UK traded $51 billion dollars of goods and services with the USA. But the inverse is not true: Great Britain is not even among the top five US trading partners (Canada at $241 billion, Mexico at $194 billion, China at $134 billion, Japan at $67.5 billion, and Germany at $61.6B billion).
MIT publishes an excellent visualization tool that allows you to explore the bilateral trade between the UK and the USA.
Top 5 Export Categories
Top 5 UK Exports to the USA
Top 5 USA Exports to the UK
24%Machines24%Machines18%Chemical Products21%Transportation17%Transportation13%Chemical Products11%Minerals7.1%Instruments6.7%Instruments6.7%MineralsLink to Source Data UK > USALink to Source Data USA > UK
TIP: Use the links above to access import/export data from 2014. Click on the “Depth” buttons to drill down into find the relevant statistics in your own market sector.
Concerns for Specific UK Trade Sectors
Depending on which sector you trade in, things might be better or worse with a pending exit of the UK from Europe. Let’s take a look at the UK’s key industrial sectors that will likely experience the most changes due to Brexit:
Potential Changes to the UK Financial Services Sector
The U.S. stock market suffered its worst drop in 10 months — Image by Jae Yang, George Petras, and Janet Loehrke, USA TODAY
The modern UK economy is heavily weighted toward services (nearly 80%) with financial services responsible for approximately $155 billion USD in 2011. If financial trading with the EU common market is restricted, major financial institutions will follow through on plans to relocate key elements of their London offices to EU cities like Dublin, Paris, Frankfurt, and Amsterdam. If this happens across the board, the UK could lose significant wealth in the coming years.
What to watch out for: Investment Bank Goldman Sachs announced on Thursday, August 4 plans to restructure their London operations to move key staff to the EU.
