Everything was going well. And then, there was the Brexit. These few words are enough, to sum up, economic and financial developments observed in the last month.
The shock wave caused by the Brexit is limited for the time being mainly in Great Britain. It touches on the borders of Europe, but without being devastating, and the rest of the world is still spared. We see three vectors of contagion potential: the vector policy, the economic vector and vector financial. The vector financial is generally the one who responds most to any shocks, and its scope was global when the news was known. Immediately after the vote, the markets have turned risk-off.
The shares have plunged, yields on government bonds have reached lower levels, and currencies have reacted with extreme movement. The British pound has fallen to its lowest level for more than 30 years against the US dollar, while the currencies considered safe havens, including the Japanese yen and the Swiss franc has significantly appreciated. However, the financial markets have for the most part picked beautiful colors.
“Anarchy in the UK”: The Fracture
Compared to the other two vectors, the vector policy, somewhat unusually this time, is a mechanism for rapid transmission. I am still trying to understand what the supporters of the Leave wanted to say with their take back the control. What the Uk is getting closer especially, it is of the fracture, represented by The Economist on its cover “Anarchy in the UK.” Impossible, when one speaks of anarchy in the United Kingdom not to mention the punk movement of the 1970s.
Their No future is a slogan somewhat appropriate to describe the situation that prevailed in the days that followed the announcement. The fundamental question remains as to whether the article 50 will be activated or not, which would, if applicable, the countdown to the withdrawal of the United Kingdom of the European Union. If there’s a common point between the punk movement and the political chaos that has reigned in the United Kingdom, it is the ephemeral nature. In fact, with the appointment of Theresa May as Prime minister, the political stability seems to have been restored.
In the aftermath of the vote, the 27 member States of the Eu appeared united, and have managed to avoid the shock of institutional and policy British from spreading to the mainland. The political risk in Europe remains one of our primary concerns, even if we welcome this unit suddenly found.
A Recession Inevitable
The last vector, economic, a key to the United Kingdom to the front, starting with the engine of the country, London. Investments and real estate have been hit as soon as the result of the vote was known. A recession seems the most likely outcome. The impact on European activity, although contrary, is more difficult to estimate. According to economists, the growth could be planed down half a percentage point and is expected to reach 1 % for the euro area in the coming quarters. If this forecast is confirmed, the job creation will slow down, just like private consumption.
If the recession is the price to pay for freedom, the French presidential elections and the elections in the German state planned in the next year could lead to results pro-establishment: any recession-generated political causes would cut the grass under the feet of the independent parties and populist.
The economic vector includes still another dimension, the rate of inflation. The Brexit product of the effects of deflation, even if paradoxically, in the weakness of the British pound should push inflation up in the Uk in the coming months. In the Face of this economic outlook darkened, the probability is high that the Bank of England reduces its rate or raise its quantitative easing program if the situation were to deteriorate more than expected.
In Europe, the inflation outlook could be revised downward. We remain convinced that Europe does not need additional stimulus measures in the light of monetary conditions is already very accommodative at present. That said, it cannot be excluded that the ECB decides to expand its program. At least it has reached its limit.
In summary, the Brexit has clouded the macroeconomic scenario. In Europe, the main risk relates to political developments are unfavorable, which may arise at any time, as we were brutally reminded the Brexit