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What ‘Brexit’ means for the global economy

DAVID McHUGH
Associated Press

Frankfurt, Germany – — Britain’s vote to leave the European Union adds a heavy dose of uncertainty to a world economy that is still struggling to reach full speed years after the global financial crisis.

The most immediate pain will be felt in Britain. But economists say the ripples could be felt much farther afield.

Companies will wonder whether to invest or locate in Britain during the yearslong negotiations to define new trade conditions with the EU, its biggest business partner. Across Europe, trade and immigration may lose ground to nationalism and protectionism.

The EU itself, minus market-oriented Britain, may turn to more government intervention and regulation. Other countries may eventually seek to leave the bloc.

“A new set of economic circumstances has been created, which the world will have to deal with,” said India’s Finance Minister Arun Jaitley.

The global economy isn’t in crisis at the moment, but growth is muted and uneven among countries. The International Monetary Fund forecasts growth of 3.5 percent for this year. The Chinese economy is slowing, the U.S. recovery has hit a slower patch, major emerging economies like Brazil are in recession, and Europe and Japan are stagnating.

Here’s a look at what the vote means for the world economy:

Economic growth

The most direct economic pain will be felt by the U.K., while the direct consequences for the world economy are likely to be more moderate. Moody’s Analytics estimates that global economic output would be 0.25 percent smaller after five years than it otherwise would have been, while the EU would be a full percent smaller and the U.K. 4 percent.

Then there are indirect effects. Stock market plunges can make people feel poorer and less likely to spend. Uncertainty can make executives put off investments in new production.

Central banks

The market plunges after the vote are one reason for the world’s central banks to keep their rock-bottom interest rates in place.

The Federal Reserve is less likely to raise short-term interest rates this year — and might even have to cut them. Greene predicted that the Bank of England could have to print money to finance government spending, tax cuts or both and that the Bank of Japan could follow. The European Central Bank might expand its bond-buying stimulus program.

Trade

The impact on U.K.-EU trade would depend on how quick and amicable negotiations are on a new set of relations. Britain could wind up like Switzerland, which simply adopts EU requirements without having any say in how they are decided. Britain sends 44 percent of its exports to the EU.

The price for continued market access, however, could be allowing free movement of workers. A desire to control immigration was a major force behind the “leave” campaign, so it’s unclear if such an agreement could ever be reached.

“If the U.K. takes a tougher stance on immigration, for businesses this will be a disaster as the EU will retaliate,” said Christian Stadler, professor of strategic management at the Warwick Business School in Coventry, Britain.

Markets

Stock markets plunged Friday while the pound hit a 31-year low.

Outside the U.K., however, that turmoil may not last. Analysts at Oxford Economics think the global market reaction and fears of an EU breakup are exaggerated.

Friday’s drops “are hard to square with the likely long-term impact on the U.K. — at worst a few percent of GDP in the long run in an economy that is only 3.5 percent of world output.”