The global economy is reeling from the implications of the country’s decision to leave the EU. Markets will face political and economic uncertainty for years to come.
Unfortunately, the impact for American firms may be just as severe as for British companies.
Economies that are far from Europe are already catching the cold. Following the vote, $3 trillion was wiped from stock exchanges across the globe.
Corporate buyers in China are already reducing orders. The Purchasing Manager Index, a measure of expectations for manufacturers and a gauge of overall outlook for the economy, has dropped to a four-month low.
British capital markets are in turmoil. The pound stands at a thirty-year low against the dollar. Banks have also taken a beating. Share trading for Barclays and RBS has been suspended.
Analysts at Goldman Sachs, whilst forecasting a recession for the UK in 2017, also predicted that the global economy will see its growth rates diminish.
Business abhors a vacuum. Currently, companies are looking to politicians for answers and yet leaders are merely gazing at each other with shrugged shoulders. The Prime Minister has resigned and the main opposition party is engulfed in a leadership crisis.
As Britain drifts rudderless in a world of its own making, it has become clear that there is no plan to manage the crisis. The referendum, designed to settle the relationship between the UK and Europe, has only served to deepen the uncertainty as new questions stack up in a bulging portfolio of problems.
When will Britain formally leave the EU? Will it retain membership of the Single Market? Will there be cross-border tariffs? How will businesses be regulated?
Companies that had relied on the stability afforded by a union of economic harmonization are now reeling by the sheer quantity of quandaries that are undermining confidence in the international economy.
In the new unstable economic order, investors and businesses are reluctant to risk resource on the British economy. A quarter of British businesses are set to freeze recruitment. In effect, markets within the UK are beginning to grow cold as important decisions are indefinitely deferred.
The nature of the global supply chain is inherently and almost inextricably inter-linked. A slow-down and years of uncertainty will begin to infect other economies.
Continued doubt and more damaging questions will also sap European markets. Who is next? What are the costs for European businesses of Brexit? Have they lost access to British consumers?
Fearful investors in the continent will also look for safe-havens for cash. Currently, backing European companies does not promising. The drying up of liquidity in Europe will eventually export uncertainty across the Atlantic. American firms will find it harder to sell goods to a troubled economy, and this will ripple doubt across the States.
Before the vote, Federal Reserve chat Janet Yellen warned of “significant economic repercussions” for the world. Even if your US based business does not trade directly with Europe, the connectedness of suppliers and buyers means that destabilizing any node in the system will negatively impact on all those that are part of it.
Financial markets are in shock. This will impact the broader market. Not only will credit grow more expensive and rarer, US orders, as we have already seen with China, will slow. Smaller companies will be hit first as they are seen as ‘high risk’ by big business. Reducing consumer confidence will also dull economic activity.
Currency volatility will impact cross-border trade. Further reducing the availability of goods, services and money.
This is painting a grim picture. And sadly, there is little positive news to report upon.
That said, there are a sprinkling of opportunities for nimble businesses brave enough to take advantage of the upheaval. Inflationary pressure may be felt in some markets, but those importing from British sellers will be pleasantly surprised that the excellent value offered by a sinking pound.
But businesses will require a courage and a keen perceptiveness to pick out the opportunities in this crisis.
The reality for American business is not if Brexit will affect it, but when.
Reference:
Jonathan Webb
Follow him on twitter: @j_p_webb
