Britain's decision to leave the European Union (EU) is aggravating anxiety about the direction of the global economy. If confusion in global financial markets is prolonged, adverse effects will inevitably be felt in the real economy, and the British economy's chaos may spread to Europe, China and other countries around the globe. The world economy is facing new risks.
The June 23 referendum's results sent the yen soaring against major currencies and the values of the British pound, the euro and other currencies of the world's emerging economies plunging. Investment funds shied away from risk assets and snapped up the relatively safe Japanese yen and U.S. dollar. Investors are getting cautious about making new investments in risk assets, and outflows of funds from Europe and emerging countries may continue in the future.
The bankruptcy of Lehman Brothers Holdings Inc. in the autumn of 2008 struck U.S. and European financial institutions that had shouldered bad loans due to the burst of a real estate bubble, extending a chain reaction of credit uncertainty and causing a worldwide financial crisis. This time, investors are trying to avoid risks amid a sense of uncertainty stemming from Britain's vote to quit the EU. If pessimism about the future of Britain and the EU spreads, suspicions may further envelop financial markets and lead to a depletion of funds.
Toshihiro Nagahama, chief economist at the Dai-Ichi Life Research Institute Inc., says, ''If global governments and financial authorities fail to adopt a proper policy response, a sense of uncertainty about the future will heighten and inevitably dampen the global economy.''
Even if the chaos in the financial markets is brought to an end, uncertainty about the future direction of the global economy is unlikely to dissipate. Prime Minister David Cameron emphasized that the British economy is ''fundamentally strong'' and there will be no immediate change in the economic climate. But Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research, pointed out that the Brexit vote would bring down the value of the pound and British firms would face higher costs of borrowing funds, seriously affecting their corporate activities. Britain's impending departure from the EU has led many companies to vow to relocate their operations from Britain to continental Europe, possibly reducing investments.
For China, the EU is its largest trading partner and if the European economy decelerates, the struggling Chinese economy may further slow down. Yusaku Nishimura of the University of International Business and Economics in Beijing says that if the EU economy suffers damage from Britain's exit, negative effects on the Chinese economy will grow.
The U.S. Federal Reserve's projected action of raising interest rates may be further delayed. Employment was slow in May and a sense of uncertainty about the direction of the American economy is deepening. The confusion in Britain and the EU may lead to a worsening of U.S. corporate performance and depress consumer confidence. Fed chief Janet Yellen said in congressional testimony on June 21-22 that Britain's exit from the EU would have "significant economic repercussions" and affect the U.S. economic outlook. While it's not clear how the British vote would cause repercussions, uncertainty surrounding the direction of the global economy may linger.