Brexit: Indirect effects to consider - Wells Fargo

According to analysts from Wells Fargo, theory indicates that the effects of Brexit should be limited but there are many indirect effects that could have a larger impact.

Key Quotes:

“Uncertainty related to Brexit likely will depress investment spending in the UK”

“The direct effects of Brexit on the US economy should be limited.”

“In theory, yesterday’s decision by British voters to exit the EU should have few direct effects on the global economy. Although the UK economy could slip into a mild recession in coming quarters, it accounts for only 4 percent of global GDP. A downtown in the UK, when considered in isolation, is not likely to produce a global recession. But that is not the end of the story. There are also indirect effects to consider. The tightening in financial markets that has occurred today, if maintained, could exert a slowing effect on economic activity in many economies. An eventual unraveling of the EU, although not very likely in the near term, cannot be completely discounted either in a medium- to long-term framework. Geopolitical uncertainty could have a depressing effect on economic activity via weaker investment spending.”

“We are not at the point where we would forecast a global recession based on Brexit. For starters, policymakers, especially central banks, could respond in coming days and weeks to the financial shock with even further policy accommodation. Much will depend on the evolution in financial markets in coming weeks. In general, however, Brexit is a major development, not only in an economic sense but also in a geopolitical one. The full implications of Brexit are impossible to foresee at this time, but we are prepared to adjust our views in coming weeks as events dictate.”