U.K. voters elected to exit from the European Union. This is a major shake up for the U.K. and the rest of Europe and is almost certain to rustle, rattle, and otherwise jolt the U.S. economy.
The first impacts will be seen in foreign exchange markets as skittish investors pull out of U.K. and European markets to put their money in the safety of U.S. assets. Several economists predict the impacts of Brexit on the U.S. will be confined to our financial markets. Nevertheless, the result will be a rising dollar relative to the pound and the euro.
Many economists expect some ripples of Brexit hitting the U.S. economy. In which case, the next round of impacts will be seen in trade as a surging dollar suppresses demand for U.S. exports. In addition, economists are forecasting a slowdown in the EU economy, further depressing demand for U.S. exports. As a result, several researchers have cut their forecast of U.S. economic growth to less than 2 percent over the next year.
On the upside, a stronger dollar will reduce the cost of imports lowering U.S. production costs, boosting consumer buying power, and limiting inflation.
The U.K.’s exit from the EU may stifle cross-border merger activity as London is no longer seen as a gateway to European markets.
Brexit’s biggest unanswered question: What will happen to free trade?
While much of the U.K. vote to exit the EU was driven by concerns over immigration and hatred of the EU’s bloated bureaucracy, the Brexit campaign was suffused with protectionist undertones. Both Hillary Clinton and Donald Trump have clearly stated their opposition to free trade deals. If Brexit boosts protectionism worldwide, expect to see much slower growth—or recession—in the next few years.
The bottom line …
Pros: A strong dollar will reduce the cost of imports and keep inflation in check. U.S. importers and consumers will benefit from lower prices. It’s a good time to take that European vacation.
Cons: A strong dollar and EU economic slowdown will reduce demand for U.S. exports. Increasing protectionism will reduce opportunities of international trade. U.S. exporters will be harmed. Potential slowdown in already slow employment growth.