This month on the blog we are taking an in-depth look at Brexit and the effects that UK withdrawal may have on the global economy. Here is a look at one perspective on how Brexit could actually be a positive for the global economy.
One contributor to Forbes, Bryan Rich, recently outlined two reasons that Brexit could be “a big net positive” to the global economy. The first has to do with getting approval for fiscal stimulus. According to Rich, in a debt crisis, it can be difficult to convince politicians to take the risk of approving spending packages when overindebtedness is threatening to cause worldwide collapse. But by now, politicians have noticed that without growth, the debt problem doesn’t get any better; it can only become more threatening. This makes fiscal stimulus one of the few viable solutions left for our global situation, because it has the potential to end the low and stagnant growth rut that we’ve been seeing worldwide for the past seven years. Now with the uncertainty surrounding the Brexit vote, politicians may finally feel that they have reason enough to approve fiscal stimulus.
A second potential positive, as outlined by Rich, has to do with the Japanese yen. Overall, it looks like the yen is doomed to see mass devaluation. Japan has the largest government debt problem in the world. Their economy is stagnating and seeing major demographic challenges. Their currency is undervalued. And at the end of June, Japanese stocks were sitting at “Brexit fallout” lows, yet other markets such as US stocks and UK stocks had already recovered. Since then, Japan has announced that this year they will be rolling out a $200 billion spending package—that’s 4% the size of Japan’s GDP. In response, Japanese stocks jumped sharply, and the yen has been weakening significantly. Chances are the Bank of Japan is going to continue with bold financial action that crushes the yen, and in the case of the Japanese economy, bad news is good news for the global market.
Of course, still only time can tell what effect Brexit will have on the global economy. As of late, experts are having mixed predictions. Many point to gains in global stock markets, with stocks in mid-July being traded within sight of their highest levels of the year. Others point to how many factors still remain undecided. Is the threat of a Scottish referendum for separation from the UK real? Will other EU member states consider breaking away from the European Union? These are all questions that only time can answer.