By Chad Moutray, chief economist for the National Association of Manufacturers (NAM)
The United Kingdom’s decision to leave the European Union has rattled the world. Here are some questions and answers on what this vote mean for manufacturers.
Q: The United Kingdom Voted to Leave the European Union. What is happening now?
A: The United Kingdom voted to leave the European Union yesterday—the so-called “Brexit.” For most, this was a surprising result, with many analysts expecting pragmatism to win at the end of the day. With Brexit moving forward, markets are showing declines seen in the United Kingdom itself and throughout the world. For example, one British pound exchanged for $1.4784 on June 22 is now currently selling for $1.3606, a level not seen since 1985.
Q: What Does This Mean for Us?
A: More than anything, the Brexit vote has added yet another element of uncertainty into the marketplace, which could further undermine growth within Europe and potentially globally. From that perspective, the result in Britain adds to what has already been an unpredictable year. If you are a manufacturer making hiring and capital spending plans, there is a lot to be worried about globally. While the most recent NAM Manufacturers’ Outlook Survey reported slightly better expectations than three months ago, manufacturers’ international assessments clearly mattered. Those companies that were more positive about exports were more upbeat in their economic outlook and vice versa. The bottom line in those findings, however, was that respondents remained quite cautious, with overall activity well below where we would like to see it.
It is also important to note that Europe is a key market for manufacturers in the United States. U.S.-manufactured goods exports to Europe, our second-largest trading region outside of North America, totaled $280.6 billion in 2015. In addition, the United Kingdom is our fifth-largest trading partner ($48.6 billion), with Germany at number six ($44.6 billion). What’s more, manufacturing companies have a significant presence in Europe, including headquarters and production facilities. As such, we need a strong and vibrant Europe—one that continues to buy our products. That is true regardless of whether the United Kingdom is part of the European Union or not.
Q: What Happens Next?
A: Moving ahead, yesterday’s vote leaves a lot of questions, which we hope will begin to be answered in the coming months. Prime Minister David Cameron will resign in October and a new leader will negotiate with Europe about the exit. That process is expected to take a minimum of two years. Once Britain does eventually leave the European Union, the United Kingdom will then be able to negotiate new agreements with other countries, such as the United States. My colleague, NAM Vice President of International Economic Affairs Linda Dempsey, has more on the trade impact of this vote.
Q: What Does This Mean for the World Economy?
A: In the run-up to the election, a number of economic studies published dire consequences, both for the United Kingdom and for the Eurozone, if Brexit succeeded. Given that many of these were meant to encourage pragmatic voters to stay in the European Union, some have argued that the estimates of economic calamity were a bit overblown. Yet, it is also true that growth will suffer, at least in the short term, particularly as consumers and businesses grapple with the uncharted nature of the result. In addition, more than half of British exports flow to the European Union, making the continent one of its largest trading partners. If access to the rest of Europe were threatened, this outcome could significantly weaken economic growth in the U.K.
With that said, I am skeptical, at least for now, that Brexit would be enough to push the continent into a recession. The United Kingdom had been one of the stronger economies in Europe, and this will likely continue in the long-term, but for the coming few quarters, growth could be more stagnant than we might prefer.
It does create some challenges for businesses, particularly those that have a presence in the United Kingdom as a gateway into Europe. This is especially the case for the financial sector in the United Kingdom, but it is also the case for manufacturers. Those firms will likely watch the upcoming negotiations closely, ensuring that their ability to trade with the continent and others remains unabated.
Author Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.