On June 23, the people of the United Kingdom voted to leave the European Union (EU). It was the largest voter turnout since 1992, with more than 30 million people (nearly 72 percent) participating. The margin was very close (about 52 percent to 48 percent), and it was unclear which side would win up to the last minute. The economic fallout of the decision will likely be decidedly negative for the U.K., but also for the United States and Texas. It is much too early to know how things will unwind, the pace of the split, or what it will look like on the other side. This lack of clarity is in and of itself a problem for global markets, but an initial perspective is useful.
The motivations for the decision for Britain to exit the EU (or Brexit) varied. Some of those in favor of leaving pointed to EU rules on businesses (which can be convoluted), laws the British people are subjected to that are decided by the EU (rather than democratically), and high EU membership fees (which exceed what the U.K. gets back by billions of pounds per year). Others were more concerned with immigration and the lack of British control over its borders.
The reasons to stay include security and the benefits of free trade among member nations, as well as the preservation of stable and long-standing institutional arrangements. Interestingly, the flow of immigrants was also used as a reason to stay, with the argument that most of the people moving are young, looking for work, and a desirable addition to an aging labor force. Businesses were generally in favor of staying in the EU, as was the leadership in both major parties and political leaders around the globe.
Most analysts are indicating the vote will likely push the UK into a recession. Growth had been lackluster before, and the Brexit-related uncertainty and other fallout will be difficult. Several other European economies were expanding at meager rates and may also go into the red. As the shock waves began to be felt throughout the U.K., it became apparent that many already have “buyer’s remorse” and had absolutely no idea the effects that their votes would have and now wish they had selected to “Bremain.”
For the United States, the consequences are expected to be negative, though not catastrophic as long as Brexit is not the first event in a chain that destabilizes Europe. The adjustment period will involve uncertainty as well as a negative impact on trade. The ultimate effects depend in part on how efficiently and effectively the United Kingdom is unwound from various trade agreements, since the U.K. and several other European nations are important U.S. trading partners.
Although the U.S. stock market has begun to recover some of the losses suffered in response to Brexit, I expect it to remain somewhat lower than it would have been otherwise, which is bad news for retirement accounts and investments. The dollar will also likely strengthen relative to many currencies and global growth will slow, both of which are problems for U.S. exports. The Federal Reserve may continue to hold off on raising interest rate targets to ensure the U.S. economy is weathering the Brexit storm. All in all, I don’t think it’s likely that the U.S. will slide into recession, though performance will be affected to some extent.
For most individuals and businesses in Texas, Brexit will not have a large long-term effect. Mexico and Canada are far and away the dominant trading partners for Texas, accounting for almost half of exports. Since the U.K. ranks outside the top 10, Brexit will affect Texas somewhat less than some areas with more European-dominated trading patterns.
However, as a result of slowing global economies and a stronger dollar, oil prices may be impacted. Lower oil prices are obviously harmful to parts of Texas including not only the production regions, but also Houston, the Metroplex, San Antonio, and elsewhere with substantial headquarters operations and other energy-related firms. Additional industries adversely affected include logistics, international trade, and transportation.
Clearly, Brexit spells the end for several long-standing international institutional arrangements. It will generate a lot of uncertainty which will be factored into business investment decisions, with long-term consequences. It will also have unintended and unexpected effects that are inevitable when something of this magnitude occurs. Although it remains very early in what will be a long process, my initial assessment suggests that the impact of Brexit on Texas and the U.S. will be adverse and measurable, but that it can be weathered without major setbacks given the size and scope of the overall economy.
M. Ray Perryman is president and CEO of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.