Right up to Thursday’s vote in the United Kingdom regarding whether or not to leave the European Union, there was a confidence that cooler heads would prevail and the U.K. would remain in the EU. The vote was close, as expected, but the British are no longer part of the European Union. In addition, Prime Minister David Cameron announced plans to resign, the pound has crashed to lows not seen in over 40 years and, barring some sort of unlikely reversal, the country is in for massive economic and political turmoil.
For business of various sizes based in the United States, there are various layers of impact:
- The British pound quickly moved to freefall mode, worsening the worries of companies already hampered by weakening currencies in the EU and emerging economies against a very strong dollar. The dollar is perhaps headed to new highs. This will kill the recent recovery in exports, which is not good news for U.S. manufacturers and goods suppliers. The gross domestic product of the country remains dependent on exports for between 15% and 25% of the total and that could be cut by a third as the dollar gains. The U.S. is not the only state to see its currency surge, as the Japanese yen has also moved up, which is more disastrous for a country that that is even more export-dependent.
- The Federal Reserve backed away from an interest rate hike in June because it feared turmoil in Europe and those fears turned out to be well-founded. With newfound volatility levels and the soaring dollar, hiking rates has become that much harder. Some economists now suggest that it will be late in 2017 or even 2018 before Fed rates increase again. Frankly, this is a panic reaction and predictions that far out are not very helpful. Still, it is clear the Fed will have to wait for months to gauge the ultimate fallout.
- The U.S. has lost its most important European ally, which means greatly reduced influence over Europe. The French have generally been outright hostile to the U.S. and its goals, and the Germans are very often opposed if not combative. The U.K. championed U.S. policies in everything from economics to the military, and they will no longer have a seat at the table. In addition, the U.S. needs a healthier Europe for both economic and political reasons—this is all but guaranteed not to happen any time soon in the wake of the “Brexit” vote.
Chris Kuehl, Ph.D., NACM economist and founder of Armada Corporate Intelligence. Chris Kuehl is a former director of BIIA and a regular contributor to www.biia.com