On June 23, 2016, the UK voted to leave the EU. This news was followed by David Cameron’s (UK Prime Minister) resignation, while the pound fell to its lowest value (against the USD) since 1985. As a result, global markets were thrown into a state of turmoil, suggesting a period of uncertainty for the world economy in the near term.
Amid this turbulent scenario, The Smart Cube assesses Brexit’s impact on the US’ economy, trade, and businesses.
“Brexit is expected to hit the US economy in at least three key ways. It will strengthen the dollar, weigh on business confidence, and tighten financial conditions. All of that will saddle American businesses and investors, particularly those with a strong presence abroad. American households, on the other hand, could see some benefit from cheaper imports and gas prices.” –The Wall Street Journal (June 2016)
Brexit will, in all likelihood, impact the US economy, moving markets and driving up the USD’s value. According to Goldman Sachs, every ~10% rise in the USD shaves off ~0.6 percentage points from the country’s economic growth.
Moreover, global market volatility tends to sour the risk appetite of US corporations that may prefer pausing on new investments until the Brexit storm passes. This may result in slower productivity growth, further holding down wage rates in the country.
“I think it is unlikely that the US consumer—the primary driving force behind the US’ economic recovery—will be thrown off by Brexit in the short term. If there is contagion to the rest of Europe, however, then a US recession becomes more likely.” –Megan Greene, Chief Economist, Manulife (June 2016)
The UK and the EU account for ~2.5% and ~18.9%, respectively, of the US’ total imports, and ~3.7% and ~18.2%, respectively, of the US’ total exports.
A relatively stronger USD —a result of the Brexit—is likely to make US imports more expensive in Europe, thereby sapping demand for US products, especially if consumer confidence deteriorates in the region due to the prevalent uncertainty. On the other hand, a powerful USD will imply cheaper imports from the UK and the EU, as well as lower travel costs for US tourists visiting these regions. Sectors such as aerospace, pharmaceuticals, chemical, automotive, machinery, and electronics are likely to be the most impacted in the US.
Energy and IT companies will likely be hit the hardest, as ~6.4% and ~4.0%, respectively, of their revenues are earned from the UK market. Other sectors such as automotive, FMCG, F&B, and clothing are also expected to be adversely impacted. As the Brexit vote was announced, the S&P 500 fell 2.4% in the first hour of trading.
Further, companies with significant revenue exposure to the UK and the EU will bear the brunt of reduced foreign earnings due to a strong dollar.
The Way Forward
If you are an industry professional, the following questions could be worth exploring:
Have you modelled the potential impact of Brexit on your company and the US? How will your current and future earnings be affected?
Which business function (sales, procurement, etc.) will be most heavily impacted?
What are the potential strategies suitable for your company to mitigate potential risks arising due to Brexit?
What are the key best practices regarding risk management of aspects such as currency, workforce, and supply chain followed in your industry?
Amid the prevailing uncertainty, some industries, as we know them, may be materially impacted in a post-Brexit reality. To learn more about how to combat the impact of Brexit, take a look at our article detailing potential mitigation strategies for companies