Could British EU exit be watershed for global economy?
London (JUn 19) A British exit from the European Union could cause global market swings for a while. But that would soon pass. If we're lucky, that is.
Much darker scenarios for the global economy are also being discussed by economists as they try to gauge the risks of Thursday's referendum for the wider world.
While economists say a British exit from the EU — or Brexit, as it is known — would be painful mainly for the country itself and to a lesser extent for rest of the Europe, the consequences for the global economy are harder to estimate.
In the gloomier narratives, a Brexit becomes a turning point, an event that snowballs and leads to much larger and nastier problems. It could deal a setback to free trade and globalization, which many disgruntled voters around the world are already cool on. And it could trigger more defections from the EU, destabilizing the region and unsettling companies and consumers.
So forecasts are ranging from the benign to the apocalyptic.
Some, like outgoing Finnish Finance Minister Alexander Stubb, compare Brexit to the 2008 collapse of U.S. investment bank Lehman Brothers, which spread financial ruin across the globe. Or, it could be more like Y2K, in which computers worldwide were supposed to fail on Jan. 1, 2000 because software was written for years beginning with 19-. In the event, not much happened.
Here's a quick run-through of the global risks from a Brexit.
FLIGHT TO SAFETY
It's reasonable to assume that a vote to leave would cause global financial market swings in the short term, with investors selling riskier assets such as stocks and seeking safety in government bonds, analysts say. The pound has already fallen in value against other currencies and would likely fall more. Gold, seen by some as a refuge in troubled times, might rise.
Markets seem to be betting that "remain" will win, so if they're wrong, there could be some scrambling to adjust.
LOWER FOR LONGER
Faced with churning markets, central banks could try to steady things with extra loans for banks or other ways of making credit more readily available. Market swings could help persuade the U.S. Federal Reserve to postpone interest rate increases once thought likely this year and now in doubt. That could be good news for mortgage holders but could prolong savers' agony over low rates and non-existent returns on deposits.
The direct impact of a Brexit would likely not be too bad on growth — if you're not British. A year after a vote to leave, Britain's economy would be one percent smaller than it would have been otherwise, while the 28-country EU would lose 0.25 percent and the world 0.1 percent, according to Moody's Analytics chief economist Mark Zandi.
"I think the immediate effect is modest," he said. "It's not cataclysmic in any way. It's corrosive, certainly. It diminishes the U.K. economy going forward."
Taking 0.1 percentage point off global growth might not seem like much, but the world economy, though not in crisis, is not in great shape right now. The International Monetary Fund predicts 3.2 percent growth this year and 3.5 percent next year. IMF head Christine Lagarde says that's not enough to lift living standards and get the globe's 200 million unemployed back to work. "There is a risk that middle class families and the poor actually remain behind, which would embolden the voices of protectionism and fragmentation," she said in April.
The World Trade Organization says international trade will remain sluggish this year, growing 2.8 percent, well below the average of 5 percent since 1990.