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Brexit: what it means for the US economy

Stock photo of the stock market
“If I read this chart correctly, we’re all gonna die.”
Spencer Platt / Getty Images

The UK’s decision to abandon the European Union and all the trade and economic advantages that membership offers has sent markets into turmoil. The pound is at its weakest point in decades, the Dow and S&P 500 have plunged in the US, and oil prices are plummeting.

All of which confirms what many observers have feared: Brexit will have serious economic ramifications not just in the UK but around the world.

The precise impact is unknowable, but Joseph Lake, the director of global forecasting at the Economist Intelligence Unit, and his team of forecasters have been using their models to predict economic and political outcomes in the UK, EU, US, and beyond. We spoke on the phone Friday; a transcript, edited for length and clarity, follows.

Dylan Matthews: It seems pretty clear the UK’s economy will suffer. The government has estimated that the economy will now shrink by 6.2 percent and GDP per capita will fall by more than £4,000.

What about the US? Should we expect aftershocks here?

Joseph Lake: The big hit will be to the UK economy, but we don't think the biggest hit will happen until next year. It'll be a second-order effect: a fall-off in investment, a decrease in employment, etc.

This year, we have market effects: oil prices, the pound. That will have an effect on the US economy, similar to what we had in January, with markets plunging over the Chinese economy. The fall in global stock markets will hit consumer and business sentiment in the US, and that will seep through and depress consumer spending and business investment.

We've trimmed our US growth rate from 2 percent to 1.8 percent. It's not a huge impact, it's marginal, and nothing on the scale of the financial crisis, but it is a real impact on the US economy. We no longer expect the Fed to lift interest rates. We thought they'd increase rates once or twice this year, but not anymore.

DM: "Leave" supporters have cited the fall of the pound as a potential positive. It helps British exporters and makes tourism in the UK more attractive. Is that a real factor? Is it swamped by everything else?

JL: Some sectors will do well out of this, but the net impact will be extraordinarily negative over the next five years.

We think by 2020 the economy will be 6 percent smaller than it would have been under a non-Brexit baseline. We expect there will be an increase of unemployment of 380,000 people.

Yes, a cheaper pound will help. It will boost tourism; there are certain industries that will do well. But the uncertainty this creates, which will hang over the UK for the next three to five years, will overwhelm that.

One of the great advantages of the UK was the certainty of the business environment, that it was predictable and well-regulated and well-governed. This removes in one fell swoop so much of what the UK had going for it previously.

DM: A major fear is that exiting will hurt London’s standing as a financial sector and lead banks to relocate to places like Dublin or Luxembourg that are still in the EU. How fast should we expect that to happen?

JL: We don't expect that to happen in the near term. Those investment decisions happen over a much longer time frame. We do expect this to damage the UK as an investment destination.

The way to think about this is less about banks moving their headquarters from London to Luxembourg, but where are they going to be spending their marginal dollar? It's not going to be London.

DM: It sounds like you’re saying the biggest medium- to long-run effect will be about business certainty: Investors just won’t feel as comfortable putting money in the UK anymore. That seems to come up more than direct effects, like the cost of the EU slapping tariffs on British goods.

JL: I would agree with that characterization. Political and economic uncertainty will weigh more than "will the tariff be 10 or 15 percent."

DM: How heavily does the integrity of the UK itself weigh in your projections? How important a factor is, say, whether Scotland holds another independence referendum, or if you see an upsurge in Northern Irish Catholics clamoring to join the Republic of Ireland?

JL: It's definitely an important factor, certainly to me — I'm from Ireland!

We’ve been talking about what happens in the event of a vote to leave for months, and every time we've talked about it in the past 12 months, the No. 1 thing was Cameron has to resign, and that's happened instantly.

The second thing is what it means for the UK's relationship with Europe, the kind of deal they strike. The third thing is that we expect a Scottish referendum to come back on the table, though our forecast at the moment is that Scotland remains part of the UK for the next couple of years.

DM: What does this mean for the eurozone as a whole? Does it gain because it becomes more attractive to investors than the UK?

JL: We've trimmed our eurozone growth forecast. It’s not substantial: 0.1 or 0.2 percentage points this year or next year. For us, the political ramifications are much greater than the economic ramifications for the eurozone. We'd expect a Scottish referendum back in the cards, but you have to look elsewhere to see where a referendum could happen.

In the Netherlands, you already see people clamoring for a referendum. You'll see similar protests and claims across Europe.

DM: Do you think any of those other referendums will succeed? Would the Netherlands vote to leave?

JL: Our forecast is it would fail, and part of the reason it would fail is the economic hardship that the UK is about to go through in the coming months and years. That will be critical to convincing the Netherlands to stay.

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