Long-Term Effect Of Brexit On Global Markets

After the Brexit vote on 23rd June 2016 which saw the United Kingdom leave the European Union, tough economic and political questions are now surfacing as to how the outcome will impact global markets. As an immediate effect, the sterling pound plunged by about 9 percent on the Black Friday immediately after the 52% win of the Brexit referendum. More than two weeks later the pound is trading even lower against the US dollar having depreciated by about 11% against the green buck. The situation is the same across forex markets globally; with different major world currencies appreciating against the sterling pound.

Analyzing the post-Brexit fall of the sterling pound, economist Jonathan Loynes argues that the falling pound could be a blessing to the United Kingdom. In his submission he argues that with a depreciating currency, exports from the United Kingdom will be cheaper and hence more attractive in the international markets. With this increased attractiveness, Britain’s export market will be boosted and the foreign exchange earned through the international trade will help to bridge the current budget deficit in the United Kingdom.

However, analysts from a different school of thought are of the opinion that the falling sterling pound will be detrimental to the UK economy in the long run. These are economists looking at the narrative from the import side of things; where the imports to the UK will be more expensive and hence drive up inflation. If the inflation keeps rising as the sterling pound depreciates against other major world foreign currencies, the negative impact of falling real incomes and rising cost borrowing will creep into the United Kingdom. With lower real incomes, households will have lesser disposable incomes to save and invest. On the other hand, businesses will restrain from borrowing for expansion and hence hurt production and inhibit the overall growth of the economy.

From a broader perspective, United Kingdom and specifically London is viewed as the financial center of the world. Its high integration with other financial markets across the world puts it at the focal point in the global financial and investment landscape; and hence any disturbance at the markets in London will definitely have a ripple effect across the world. After the Brexit, the stock market in the US remains resilient and it is not expected to be affected by the Brexit; at least in the short-run.