Friday’s hefty global equity losses may push the world economy into a contraction, the chief economist of an economics research firm said on Friday.
Stocks and stock futures tumbled on the shock news that the U.K. had voted in Thursday’s referendum to leave the European Union. The pan-European STOXX 600 index closed 7 percent lower, with the U.K.’s benchmark FTSE 100 dropped 3.2 percent.
“We have been wary of the risks of a global economic recession for some time,” Carl Weinberg of High Frequency Economics said in a note Friday.
“We think the time has come to consider that a financial market crash today may push a world economy teetering on the verge of a contraction over the edge,” he said.
World trade declined by 1.1 percent in the first quarter of 2016 compared with the previous three months. Weinberg said this shrinkage, which he attributed to the multiyear commodity price crash, provided an early indicator of economic distress.
“The global economy has been pretty disappointing in recent year(s), even in generally prosperous financial market conditions. Today’s situation is different from yesterday,” he said.
“In our view, a slam to global wealth will bring a tightening of global financial conditions, discourage risk-taking and investment, and force a retraction of credit and leverage.”
Other analysts disagreed: Capital Economics, for instance, circulated a report on Friday headlined “‘Brexit’ is not a disaster for the world economy.'”
“Once the dust has settled, the global economic implications of the U.K.’s vote to leave the European Union are likely to prove much less dramatic than many had suggested during the past few weeks,” said Andrew Kenningham, senior global economist at Capital Economics.
Kenningham noted that global equity markets tumbled in the first six weeks of 2016, without triggering a worldwide recession.
“There are some silver linings,” he added.
“For a start, global monetary conditions may well be looser than they would otherwise have been. The Bank of England is likely to keep interest rates low for longer and, if necessary, may even announce further policy easing. The European Central Bank (ECB) will also be willing to consider not just an extension of its asset-purchase program, but an increase in its size.”
The International Monetary Fund is yet to update its global growth forecast for the Brexit vote. In April, it forecast the world economy would grow by a modest 3.2 percent this year, roughly similar to 2015 and slightly lower than forecast in January.
Bank of England Governor Mark Carney warned last month that a Brexit vote could result in a technical recession in the U.K. On Friday, he said the BOE would act to support the U.K. economy as required and would provide more than £250 billion ($343 billion) of additional funds if needed.
U.K. economic growth slowed to 0.4 percent in the first three months of the year, down from 0.6 percent in the fourth quarter of 2015.
Source: CNBC
