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Three consequences

| Posted by: Paul Donovan | Tags: Paul Donovan

  • The UK referendum result produces three broad economic consequences. The first is probably the easiest to resolve – financial system disruption. This changes policy (the BoE eases, the Fed tightens more slowly).
  • The second consequence is cyclical. Uncertainty disrupts investment and consumption. Volatility disrupts credit. The UK faces additional disruption from the moves in currency (and also political uncertainty).
  • We have reduced growth for the UK and the Euro area this year and next, and for the US next year, in reaction to the cyclical risks. The UK is (clearly) most negatively affected on domestic demand. The Euro area has some domestic demand and trade shocks. The US is mainly a trade issue.
  • The third consequence is long term trend growth. The structural changes of the fourth industrial revolution are just starting. Economies need to maximise human capital. With government debt levels elevated by the global financial crisis, trend growth could be the most important consequence.