Vanguard economist shares her view on Brexit


The U.K. is expected to begin formal negotiations to leave the European Union in March. Economist Alexis Gray discusses the potential impact of Brexit on the U.K. and global economy.

Also of interest:

Note:
All investing is subject to risk, including the possible loss of the money you invest.


TRANSCRIPT

Vanguard Perspectives® Noni Robinson: Alexis, fears of a Brexit-induced recession in the near term are starting to wane. Is the U.K. out of the woods at this point?

Alexis Gray: So it’s certainly true that in the first few months after the leave vote that the U.K. has fared a little better than what we’d initially expected, but there has been a negative impact. They’re worse off than they would have been if the vote had not gone this way. And I think the contagion to other regions seems like it’s been limited, which is good news. But we have to remember that we’re at the beginning of a very long process here for the U.K. to leave the European Union. All that’s happened so far is that there’s been a vote, but there’s been nothing changed with the law. So what will happen early in 2017, according to the British prime minister, is that we’ll see Britain formally begin the legal process to leave the European Union. And from there, there’s a two-year negotiating window where the U.K. and the EU will decide on the rules of that relationship. So [that] will determine whether or not they’ll be a free movement of people back and forth across borders and whether there’ll be tariffs on goods and services. At the moment, it looks as though we’re going to get a hard Brexit, which would mean that immigration laws are tightened and that we get tariffs reapplied. So protectionist-type measures. And that could be quite negative for the U.K. But for the time being, I think the uncertainty about what those rules look like is going to mean that companies naturally want to hold off making investments. They’re unsure about whether to hire additional people or make large investments until that becomes clear. So I think for a little while now we’re going to have this sort of cloud of uncertainty hanging over the U.K. And until all those rules are decided, that will persist.

Noni Robinson: And what impact do you expect Brexit to have on the rest of Europe and the global economy in general?

Alexis Gray: So in the first few months after the vote, I think it’s been fairly limited. The contagion to Europe, which is the closest trading partner of the U.K., doesn’t look like it’s been too bad, it’s been limited at all. But I think this is really a medium-term story. The biggest global risk to come out of Brexit is the risk that another country within the European Union decides to leave. So not just the U.K., but if we got France or the Netherlands or one of these other countries. And there’s certainly been a trend over the last several years where political parties who are anti-European Union have been rising in popularity. Not necessarily getting into government, but getting closer to it. So we could say calls for a referendum in another country and that would be a significant risk if we saw other countries wanting to leave. That’s something that we don’t know about but that’s what we’re watching closely, particularly next year with French elections coming up in the second quarter and then, later in the year, in Germany.

Important information All investing is subject to risk, including the possible loss of the money you invest. Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. © 2016 The Vanguard Group, Inc. All rights reserved.