Brexit: What It Means for the Global Economy

While thousands of details relating to Britain's departure from the EU are unresolved, nations around the world are already feeling some effects. Karen Harris, managing director of Bain's Macro Trends Group, discusses the possible economic implications for Europe, Asia and the US.

Read the transcript below.

PAUL JUDGE: A lot of turmoil, a lot of noise—help us take a step back. What does this mean, longer term, for businesses and for the global economy?

KAREN HARRIS: Well, we expect after this initial period, financial markets will come [back] after the period of shock and awe. But there will still be thousands of details to work out as to what exactly this referendum means in its course to becoming law in Britain and the course to actually exiting from the EU in whatever form that takes. And all of those—the volatility from the financial market, each of those details—will feed back into what happens in the real economy.

For example, we've already seen the strengthening of the US dollar and the yen. The flight to safety is a common reaction, an expected reaction to volatility. That may put some drag on the US expansion cycle, although the US is still in a relatively strong position. And it will be a headwind for Abenomics, as having a lower value yen is an important component of monetary policy for Japan.

It also will play [out] with Europe and the US diverging in terms of their economic prospects, with the EU, this big headwind, especially as each of these economies works through their own relationship with the EU. This opens up other vectors of action as possibilities that hadn't been considered before—at least hadn't seemed realistic before: Europe slows while the US still maintains its expansion cycle.

The final consequence of that, of course, is for China, because Europe and the US are its two biggest external customers. While most of China's slowdown is domestically created, that international aspect creates additional complexities for them as they try to navigate that going forward.

PAUL JUDGE: Does this change the general arc of the global macroeconomy?

KAREN HARRIS: In our view, Brexit has a limited impact on what we see as the Macro Trends Group base-case going forward. We still see the US as the strongest economic performer. It's in its expansion cycle. We expect to see a cyclical recession towards the end of the decade, but relatively speaking, the US remains in a decent, strong position.

Europe has been in a weak expansion cycle. Brexit may cut that short, because already Europe [is] flying—flying [may] even be an exaggeration—but close to the ground at 0% to 1%. A few sparks of growth from places, but, generally, relatively weak. This level of uncertainty—no one knows how Brexit can even play out from both a legal and financial point of view—could put a halt to that expansion cycle.

And China has been on a slowing path for some period of time, now caught, as we said, between its two largest customers, [which] puts even more outside pressure on it. Although it's slowing growth, it's largely a domestic issue rather than one that stems from its international situation.

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Read the Bain Brief: The Potential Impacts of Brexit on the Global Economy