The vote is over, the results are known, but the full implications are yet to be worked out. The effects will be felt in the UK, the EU and the wider global economy.
Already financial markets have been roiled by the decision. Currencies have fluctuated widely, the commodities markets have been impacted, with West Texas Intermediate (WTI) falling by US$3 in the first 24 hours following the vote, and the equity markets being pummeled, losing over US$2 trillion in value last Friday.
Financial stocks were one of the biggest losers, dropping over US$400 billion in value as a result of concerns regarding the impact on interest rates, liquidity, asset values and the prospects for economic growth. The magnitude of these losses would have been reflective of investors taking pre-emptive action and the markets may have overshot with positive corrections occurring in the coming weeks. Nonetheless there will be longer term effects coming out of this decision by the British that we need to address.
Let us look at the effects in summary:
The UK
The greatest impact will be felt by the UK which is now at risk of a major political split with concerns being raised that England and Wales could possibly go separate ways from Scotland and Ireland. It is very likely that the UK economy can slip back into recession and London's place as a global financial centre will be weakened.
Sterling's value vis-�-vis other currencies has been impacted negatively and all companies operating in Britain are evaluating the impact on their balance sheets and profit and loss statements as a result. One of the effects of the fall in the value of the pound will be an increase in inflation as imports become more expensive. As a consequence, interest rates can possibly increase if the Bank of England believes that it needs to intervene to prevent further depreciation in the value of sterling. There will be a reluctance to do so given the softness of the UK economy and the potential dampening effect on new investments that the Brexit decision can cause.
But it's not all bad news. Some of the positive effects of the fall in the value of sterling will be to make UK exports more competitive and companies with significant exports and overseas subsidiaries will see their profits increase. The vote can also have the effect of lowering property prices in London (one of the highest in the world) as effective demand will fall if the banks relocate.
The likely effects will, however, take some time to be worked out and we need to continue to monitor and evaluate the impact on us of the decisions taken by the UK as they begin the process of disengaging from the EU.
The World
The first area to feel the effect of course will be the European Union. There are pressures within various countries to move away from the Union. This is likely to become exacerbated. Italy, Spain, Portugal and France come immediately to mind. Some commentators believe that the effect can be an unwinding of the European experiment but that seems, at this stage, to be an overstatement. I am conscious however, that we have gotten the Brexit outcome and the Trump phenomena on the other side of the Atlantic wrong, and so we need to monitor this closely.
Already we are seeing a flight of money from emerging markets and this is likely to continue until markets stabilise.
The possibility is that the effect can be a slowing of investments in the short-term and greater risk aversion generally that can tip a teetering global economy into recession. Already there are suggestions that the US Federal Reserve may hold on any interest rate increases until 2017 or 2018.
There is no understanding of the type of trade configuration that can emerge from Britain's relationship with the EU and the likely outcome of electoral decisions in the EU in the coming months. The outcome of these matters can affect trade flows negatively and lead to a slowdown in the global economy.
All the indications point to greater downside risks generally and we need to be mindful of the effects of this on standards of living everywhere.
The world is showing a resentment to the policies of globalisation which have been championed by the multilateral institutions and implemented everywhere over the last few decades. While these policies have led to economic growth, it has also exacerbated divisions. The tensions that have been created by these policies have been accentuated by the changes in information and communication technology that have taken place over the last 30 years and which have changed the world.
The political outcome from these underlying socio economic phenomena has been the emergence of Trump in the US and now Brexit in Britain. It exists also in other countries and we can likely see its more assertive emergence in other EU countries in the next 24 months. Developing countries will also begin to demonstrate similar tensions and we can see more widespread changes. The effect of all this can make the push back on globalisation a worldwide phenomena that will have far reaching effects on the world for decades to come.
Larry Howai
Former finance minister