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The UK may have committed 'an act of economic self-harm with global ramifications'

Sam Ro
Managing Editor
A dark night in the UK. (Image: Pixabay)

In a stunning development, British voters have voted to leave the European Union.

During the weeks building up to Thursday's EU referendum, aka the Brexit vote, experts repeatedly warned of the economic damage that would come should the UK leave the euro. While polls ahead of the vote showed that the 'remain' camp would win, it appears that the 'leave' camp has won.

To be clear, the vote is only advisory and not quite legally binding. But it reflects what the voters want, and it will force policymakers to act in what could be around 2-years worth of negotiations that ends with the UK officially leaving the EU.

Economists continue to believe that this is a net negative for the UK economy at least in the near-term. And furthermore, they warn of ripple effects.

"UK voters have opted for Brexit," Pantheon Macroeconomics' Samuel Tombs said early Friday. "If fully followed through, this will be an act of economic self-harm with global ramifications."

Tombs notes that the UK could unwind this whole thing if policymakers can push through a new deal, which could be followed by another referendum in which the 'remain' vote could win.

But for now, Tombs walks clients through what happens if the UK stays on this path.

"Unless a swift deal can be done, however, the UK is likely to enter recession," Tombs wrote in a note to clients. "Businesses will hold back from investing, credit costs will rise, and import prices will soar, squeezing households’ spending power. The UK would not leave the single market overnight; lengthy trade negotiations with the EU will ensue, and the UK can’t be forced out for two years. But the direction of travel would be clear: British exporters’ access to the single market, and to markets in other countries that have free trade agreements with the EU, would be impaired."

For now, Tombs expects the Bank of England to loosen monetary policy to offset the near-term market volatility.

Still, politcal instability will ensue. Furthermore, other anti-EU movements across mainland Europe feel emboldened in their own efforts.

It's neither a smooth ride nor a pretty picture.

Perhaps the crashing British pound and tumbling stock markets may have people rethinking things sooner than later.


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