Recently, the United Kingdom voted to leave the European Union. While it will take up to two years for the United Kingdom to formally leave, the Brexit is already causing the British pound to plummet in value. Initially, the Brexit will cause imports to become more expensive for consumers in the United Kingdom. In 2015, the country imported $625 billion from nations like Germany, the United States, China, France and the Netherlands. The weaker pound will make these imports harder to afford for the British.
Concerns That the European Union Is Falling Apart
Financial markets around the world were shocked by the Brexit on Thursday. While only Britain is leaving the European Union for now, there are worries that other nations will start to leave as well. Groups in France, the Netherlands and Italy have all suggested following Britain’s lead. Since the European Union is one of the largest trading partners with the United States, trade deals would have to be restructured.
Volatile markets are never good for the American economy. American consumers are the primary driving force for the economy in the United States, and they do not buy if they feel uncomfortable about where the United States is heading. In global markets, the Brexit has already caused instability. If this continues for a few months, it could cause consumers and business owners in the United States to rethink their spending plans.
A Strong Dollar Hurts American Exports
With the pound plummeting in value, the United States dollar is becoming higher in value. While a strong dollar helps American travelers, it hurts any business that imports overseas. Last Friday, the United States dollar gained 6.3 percent versus the pound. This was the largest one-day gain since 1967. Normally, a stronger dollar lowers exports. Last year, the United States dollar advanced, which caused the manufacturing sector to fall into a five-month recession. In 2015, the manufacturing industry lost 39,000 jobs. While the stronger dollar will make imported products cheaper, the cost of exports and lower consumer confidence would balance out any benefits.
Federal Reserve Rates Remain Unchanged
In December, the United States Federal Reserve Bank announced that it would most likely raise interest rates four times during 2016. Higher rates are typically a sign that the economy is recovering, and benefits anyone who is saving or investing money. In June, the Federal Reserve committee members announced that just one rate hike would occur. This was done due to slowing job gains and weaker economic growth.
If the Brexit causes continued volatility in the marketplace and United States consumers cut back on spending, hiring will slow even more. This could cause the Federal Reserve to avoid any rate hikes during 2016. Some analysts even believe that the Federal Reserve may have to lower their rates.
At the start of this year, the Federal Reserve had high expectations for the United States economy. After nearly a decade of sluggish growth, it seemed like this was the year that would change everything around. Unfortunately, the Federal Reserve is losing its chance to raise rates. Across the world, central banks have dropped their rates back into negative territory. Instead of fueling a better economy, the Federal Reserve will be forced back into crisis management mode.
All of these changes could set the United States back months or years in the country’s economic recovery. Fortunately, the United Kingdom has never used the euro, so the volatility will not be as high as it would be if France or Italy were to leave. At the same time, the voluntary exit of one country in the European Union is a sign that other countries may soon follow Britain’s lead. If that happens, the next few years could take Americans back to the edge of the recession.