WSJ Survey: Economists See Little Brexit Impact to U.S. Growth

Employees install engines onto truck chassis at the Mack Truck Inc. cab and vehicle assembly plant in Macungie, Pa., in December, 2015. In The Wall Street Journal’s latest monthly survey of economists, nearly three-quarters said U.S. manufacturing would be hurt by the U.K. exit from the European Union. ENLARGE
Employees install engines onto truck chassis at the Mack Truck Inc. cab and vehicle assembly plant in Macungie, Pa., in December, 2015. In The Wall Street Journal’s latest monthly survey of economists, nearly three-quarters said U.S. manufacturing would be hurt by the U.K. exit from the European Union. Photo: Bloomberg News

The messy political divorce under way between the European Union and United Kingdom might dent their economies, but forecasters expect the U.S. economy to shrug it off.

The Wall Street Journal’s latest monthly survey of economists found forecasters making no major changes to their projections for economic growth this year and next, and no significant change to their outlook for the U.S. unemployment rate, due to the decision by U.K. citizens to exit the EU.

Knocking the U.S. economy off course would “need a much bigger shock than Brexit,” said Nationwide Insurance chief economist David Berson.

Asked how they were changing their projections due to Brexit, the average respondent’s forecasts for economic growth were less than 0.1% different from last month’s survey that came several weeks before the June 23 vote. The average forecast for U.S. economic growth in 2016 was unchanged at 2%, while growth in 2017 was shaded down to 2.2% from 2.3% in the pre-Brexit survey.

The exact terms of the U.K. exit from the EU remain to be negotiated, leaving much of the world awash in uncertainty over the future of trade on the European continent.

In response to the Brexit decision, the dollar strengthened and the British pound plunged. That would tend to raise the cost of U.S. exports, harming manufacturers, while also reducing the price of commodities. Treasury rates moved to the lowest on record in part because global investors sought U.S. safety.

“Brexit’s positives and negatives almost cancel out,” said Rajeev Dhawan of the Economic Forecasting Center at Georgia State University.

The survey of 60 financial, academic and business economists was conducted July 8-12. Not every economist answered every question.

Respondents were asked to gauge how Brexit would affect key U.S. industries, providing a nuanced picture of the perceived positive and negative impacts. The most concern was for the manufacturing industry, with nearly three-quarters saying it would be hurt, due to a stronger dollar and tougher environment for U.S. exports.

Other industries were seen being helped by Brexit. About 45% of economists said the construction industry would benefit due to low interest rates that reduce the costs of financing major projects and the costs of mortgages. Only 4% thought construction would be harmed.

While 60% thought financial activities would suffer, 18% said they would benefit. Even though uncertainty can be bad for markets, lower interest rates can help soothe financial conditions as demonstrated by the Dow Jones Industrial Average and S&P 500 closing at record highs Wednesday.

“Lower long-term rates make investment, and particularly that of housing, more attractive,” said Sam Kahan, chief economist of ACT Research.

While gross domestic product projections were little changed, the economists’ forecasts for oil prices and bond yields declined. Future rate increases from the Federal Reserve were deemed more remote, with most expecting no increase in the Fed’s target rate until at least December.

Lower commodity prices provide no help to the already-beleaguered U.S. mining and extraction industry. But they continue to hold down prices at the pump, allowing consumers to spend more at other U.S. businesses.

“The blow to manufacturing and mining will be dampened by the boost to consumption and consulting services,” said Diane Swonk of economic consultants DS Economics.

While most members of the economists’ panel believe the U.S. should be able to weather the Brexit, they remain on elevated alert for the possibility of the economy stumbling. The average odds placed on recession in the next 12 months rose to 22%, up from 21% last month and more than double their level from a year ago. Those odds are now the highest since December 2012.

One risk is that exit negotiations could turn rocky if the “U.K.’s departure from the EU is drawn out with unfavorable economic terms,” said Lewis Alexander, chief U.S. economist of the investment bank Nomura. Mr. Alexander cited the possibility of the negotiations turning sour as the chief downside risk.

Others cited the possibility more nations could follow the U.K. into a broader political crackup in Europe. Fears about slower economic growth in China, and reduced U.S. business investment, were also frequently mentioned as potential risks to the U.S. outlook.

Most economists said they viewed Brexit as just a temporary pause in the process of globalization. Asked which was closest to their view, 59% said Brexit was a pause and 35% said globalization was unfazed. Only 3% said they now believed globalization was heading into reverse.

Write to Josh Zumbrun at [email protected]


WSJ.com: US Business

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