Real Estate Investor Magazine South Africa August 2016 | Page 15

It is trickier to draw a line from Brexit to China.
A weaker European economy will certainly
hurt Chinese exports

I

f the preferential trade agreements which form the
cornerstone of the EU are diminished as a result
of any UK exit, this will surely have a knock-on
effect here in South Africa.
The victory for the “leave” side in the British
referendum is already having a negative effect on the
economies of both the European Union (EU) and
United Kingdom. Prior to the Brexit referendum
results, the U.K. economy was expected to expand by
2 per cent this year and 2.2 per cent in 2017. Even
under the most optimistic scenario, the U.K. economy
will likely experience a mild recession.
Meanwhile, the European Union (EU) economy
will not be impacted to the same degree as the British
economy but the ongoing uncertainty will make
annual real GDP growth of 1.6 per cent in the 201617 period difficult to attain.

Highlights

• The world economy will expand by a tepid 2.4 per
cent this year and 2.8 per cent in 2017
• The U.K. economy will likely slip into recession
following the victory by the “leave” side in the
recent referendum
• The Brexit should not have a significant effect on
the U.S. economy.
The ongoing uncertainty will impact both household
and business spending in the U.K. and EU. This
uncertainty affects the hiring and investment plans
of numerous firms. Large multinational corporations
and financial institutions that currently use London
as a way of servicing the EU market could eventually
decide to move some of their operations to Frankfurt,
Milan, Dublin, Amsterdam or Paris. This could
hurt London’s current role as the financial capital of
Europe.
For countries using the euro, the economic situation
was already grim even before being sideswiped by
the Brexit. The euro zone has been dealing with
the ongoing saga in Greece; the migrant crisis;
difficulties in Italian banks; France’s backpedalling
on much-needed labour market reforms and high
unemployment in countries like Spain. More recently,
the terrorist attack in Nice and the attempted military
www.reimag.co.za

coup in Turkey adds another layer of uncertainty to
the fragile outlook. Germany likely has the most to
lose given that the U.K. is its third largest export
market. Brexit’s sweeping impact could subtract a half
a percentage point from euro zone real GDP growth
in 2017.
The Brexit crisis will have a minimal impact on the
U.S. economy over the near term, given that the U.K.
accounts for 4 per cent of total U.S. exports. However,
the medium- and longer-term implications are more
difficult to assess
Asia is more exposed to the EU as it is a major
export destination for China. Fortunately, other
countries in the region are not as vulnerable. The
Asia Pacific region is expected to expand by 4.5 per
cent this year and next as the slowing of China’s
economy and continued weakness in Japan will offset
improving conditions in India.

The World Economy After Brexit

Brexit will hurt the world economy in other ways.
A big concern is the extent to which a retreat from
financial risk will disturb the existing fault lines in
the world economy, notably in China and southern
Europe. Italy has a referendum of its own (on
constitutional change) in October. Matteo Renzi,
Italy’s reform-minded prime minister, says he will
resign if the result goes against him. The Brexit
vote scarcely helps his chances. A widening of bond
spreads in southern Europe seems likely in the run-up
to the poll. The European Central Bank can intervene
to swamp the symptoms of anxiety by buying bonds,
but it can’t do much more to cure the underlying
problem of weak growth.
It is trickier to draw a line from Brexit to China.
A weaker European economy will certainly hurt
Chinese exports. Perhaps a bigger risk is a renewed
bout of dollar strength, as Europe’s currencies
weaken, which might in turn put renewed downward
pressure on the yuan.
Even if some investors have short horizons,
tumbling stockmarkets reflect some long-term
worries. If Britain, long a champion of free trade, can
vote to revoke a regional trade deal, how much faith
can businesses worldwide put in other international
AUGUST 2016 SA Real Estate Investor

13