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By HaleStewart June 24, 2016 7:30 am
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Thoughts on Brexit, Part 1

It's 6AM in Houston and I've only had one cup of coffee.  But thanks to world events, I have a whole lot of adrenaline.

 

Here are some initial thoughts on Brexit:

 

1.) The EU has been gaining economic steam over the last 6 months.  Industrial production has been increasing as have loans.  Consumer spending has remained surprisingly strong.  This was all in reaction to the ECBs asset purchase program. While the growth was still nascent, it was clearly there in the statistics.  For example, notice the continued uptrend in industrial production and loans: 

 

 

 

And we've seen slow but steady growth in the composite PMI from Markit:

 

 

 

All of these statistics are now close to meaningless as businesses will slam on the brakes of all current and upcoming projects.  Expect EU sentiment to plummet sharply. 

 

     2.) The UK was actually doing pretty well economically.  GDP growth was fair and unemployment was low:

 

 

However, the latest Markit reports all included observations that the then upcoming Brexit vote was causing tremendous uncertainty which was forcing businesses to greatly slow their expansion plans.  Expect that trend to sharply accelerate: no one will do anything in the UK for the foreseeable future as business awaits the UK-EU exit negotiations to start and then progress.  That means the possibility of UK recession has probably increased markedly.  

 

3.) The EU withdrawal process has an express 2-year time limit.  Several news sources have commented that the EU will not be kind to the UK during negotiations for several reasons.  First, the EU will want to punish the UK for this vote.  Second, the EU will want to send a clear message to others who might be considering withdrawal that leaving is costly and painful.  

 

More than the economic facts, it is this third point that will cause the most damage and pain over the long term.  

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