Canadian economists weigh in the impact of Brexit vote

As financial market jitters reverberated across the globe following Britain’s vote to leave the European Union, Canadian businesses, investors and economists confronted the prospect Friday of more economic uncertainty as the UK and the EU haggle over their divorce.

Doug Porter, chief economist at the Bank of Montreal, said another big issue that worries economists and investors right now is the future of the European Union as a whole.

“If it was just a matter of the UK pulling out of the European Union, I don’t believe that it would have severe financial market repercussions or economic repercussions,” Porter said in an interview with RCI. “It would be negative for Britain but it wouldn’t be that big of a deal for everyone else.”

(click to listen the interview with Doug Porter)

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But the concern is that other countries might leave the EU and that the UK itself might split apart, Porter said, especially since the Brexit vote resurrected the possibility of another independence referendum in Scotland and rumblings of discontent in Northern Ireland, both of which voted overwhelmingly in favour of staying in the EU.

Long-term uncertainty

“From the market standpoint, I think this is, probably, the point of maximum uncertainty today in the wake of the Brexit vote,” Porter said.

Some of the questions will be addressed and answered in the days, weeks and months ahead, but the markets will be following closely elections in other European countries for signs of more possible turmoil, Porter said.

Another thing that the markets will be watching is who will replace British Prime Minister David Cameron, who announced his resignation Friday, and what sort of negotiating tactics develop between Britain and the EU, Porter said.

“That will act as a source of lingering uncertainty for the markets and for the global economy over the next couple of years, but it’s a slow motion uncertainty and I don’t think it’s going to lead to further weakness in financial markets,” Porter said.

Jittery markets

He cautioned though that a lot of the market slump on Friday could be explained by the fact that the markets had rallied in the week prior to the referendum on the false assumption that the “Remain” side will win.

“It’s very interesting that as we speak the Canadian dollar is almost exactly where it was week ago, oil prices are almost exactly where they were a week ago, and the equity market, at least in Canada, is almost exactly where it was a week ago,” Porter said. “So on balance, all we’ve done today from a Canadian perspective is taken out the rally we saw in the first four days of the week.”

Consumer confidence and business investment

Pedro Antunes, deputy chief economist of the Conference Board of Canada, said one of the things he will be watching for is how these market jitters affect consumer confidence in Canada and business investment.

(click to listen the interview with Pedro Antunes)

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“We’ve already seen, for example, the fact that people are concerned about the global economy, we’ve been living in a fairly lethargic growth environment for a number of years already,” Antunes said. “This will have some implications for global growth and demand for raw materials and oil.”

And that in turn could have some implications for Canada’s revenues from the resource sector, Antunes said.

The slumping stock markets in North America also affect consumer perception of wealth, real wealth and consumer confidence, and business investment, he said.

“We feel that these impacts won’t be major in Canada but you can’t ignore them,” Antunes said. “If this uncertainty lasts rather than days and weeks, months and, perhaps, quarters, that could have some real implications for growth in Canada.”

Problems for CETA

Despite Friday’s market reaction, economic fundamentals in North America and in Canada, in particular, haven’t changed much and the BMO is not adjusting its economic growth forecasts for Canada and North America as a result of the Brexit, Porter said.

Nevertheless, Britain’s vote to leave the EU presents a big complication for the ratification of the Comprehensive Economic and Trade Agreement (CETA) signed between Canada and the EU by the previous Conservative government, Porter said.

“It may have gone so far that this isn’t going to completely derail it, but the widespread view was the UK was Canada’s biggest supporter and driver for this deal with the European Union and now with them stepping away from the European Union, one does have to wonder about the fate of CETA,” Porter said.

Weaker pound bad for Canada

Antunes said Brexit side-effects are also going to hurt some Canadian companies exporting to Britain.

The vote in Britain has led to a strong devaluation of the British pound and this disfavours Canada’s competitiveness in that market, Antunes said.

“Any Canadian company exporting into the UK certainly will suffer a competitiveness hit because all of a sudden our products are a little more expensive, I think right now 10 per cent more expensive, than they were just yesterday,” Antunes said.