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posted on 19 September 2016

Global Uncertainty In The Wake Of Brexit

from the Kansas Fed

-- this post authored by Craig S. Hakkio and Nicholas Sly

The United Kingdom's decision to leave the European Union has raised uncertainty about near-term economic growth, medium-term commercial and financial relationships between European countries, and long-term trend growth in the United Kingdom and the euro area. These distinct sources of uncertainty influence the U.S. outlook at different time horizons with different potential consequences.

Unless uncertainty leads to severe financial stress, evidence and theory suggest heighted uncertainty is a major concern for the United Kingdom, a modest concern for the European Union, and a relatively minor concern for the United States.

Uncertainty about U.K. growth in 2017 increased dramatically following Brexit, while uncertainty about growth in other major European countries increased only slightly in July and returned to previous levels in August. Chart 1 shows a measure of near-term growth uncertainty across several major economies in Europe, constructed as the difference between the high and low forecasts for real GDP growth from Consensus Economics. 1 Specifically, the difference between the high and low forecasts for U.K. growth rose to 4 percentage points, while the difference in other nations' forecasts increased by less than a half of a percentage point. In addition, the subtle rise in growth uncertainty for other large European economies dissipated quickly, disappearing almost entirely two months after Brexit.

Outside the United Kingdom and euro area, global economic uncertainty about near-term growth was little changed even as financial volatility increased. Chart 2 shows an index of foreign growth uncertainty among U.S. trading partners alongside an index of foreign financial volatility. We construct the uncertainty index using the difference between high and low growth forecasts for 17 of the United States' largest trading partners with weights equal to the share of exports going to each country. We construct the financial volatility index using variation in interday sovereign bond prices across countries, again using U.S. export shares as weights for each country. 2 The chart shows little change in global economic uncertainty after the Brexit vote: the level of the uncertainty index has remained near its lowest value observed over the last decade. In contrast, foreign financial volatility spiked following the Brexit vote. The increase in financial volatility is among the largest observed over the last decade.

[click on image below to continue reading]

Source: media/files/ publicat/research/ macrobulletins/ mb16hakkiosly0912.pdf

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