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Friday 23.02.2018 | Name days: Haralds, Almants

Nordea: Brexit will not cause a deep recession or financial crisis in EU

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU«The European Union will have to control policy following Brexit and make certain that other countries do not follow Britain’s example. There are many who are dissatisfied with processes in the European Union. It is not right, however, that the responsibility is put on the European Central Bank. The European Union can hope for economic growth because the situation has stabilized with good conditions for investments and long-term deposits,» – says Nordea Bank’s head economist in Baltics Žygimantas Mauricas.

The outcome of the referendum in Britain came as a surprise to everyone. In spite of the fact that previous surveys pointed to equal probability of both out comes, bookmakers had expected British citizens to vote in favour of remaining in the EU. On Thursday, when the first results started coming in, it seemed that Britain would remain in the EU, which caused a considerable surge in stock prices on financial markets. Unfortunately, it only served to worsen the market decline after the announcement of the final results, as reported by Nordea.

Because the outcome of the referendum turned out a surprise, the situation on financial markets was especially negative on Friday, 24 June. The biggest fluctuations were noted in the exchange rate for British pound, which had reached its maximum on Thursday only to drop to its lowest level since 1985 shortly after. European shares lost 10% on average. The banking sectors suffered most of all. American and Asian shares suffered as well, but considerably less than the European market. In total, the stock market lost nearly USD 2 trillion on 24 June.

«While analysing the actual effect on global economy and specific markets, we noticed that Friday’s decline was caused by excessive worry, which has little to do with that actual situation. This is why it is likely that we have already experienced the worst this situation has to offer. Everything should settle down by the end of the week. This is confirmed by the fact that Britain’s exit from the European Union will take at least two years. Brexit is not yet confirmed. Weekend discussions showed that there are many different scenarios possible. Signatures are being collected to organize another referendum,» – Nordea experts comment.

However, assuming Britain leaves the EU, this fact is not likely to cause deep recession or a financial crisis. UK will likely experience the biggest impact, because uncertainty will deeply affect investments. In addition, many companies could relocate their businesses from London to European Union. On the other hand, weaker currently will make British goods cheaper, which is good for exports. It could help reduce the negative effect. Brexit could worsen the mood in the rest of Europe. It is not expected to impact economic growth in a major way in the second half of 2016. The effect on the rest of the world will be even smaller. It is worth keeping in mind that the majority of global central banks have already prepared for such a scenario. They are ready to act and provide support, economists say.

«Opposite to what the market’s initial reaction, Brexit is not a catastrophe. Market should recover after weekends. By then investors will have considered the actual effect of Brexit on economy. The current situation could create attractive purchase opportunities for long-term investors. According to data from Ritholtz Wealth Management, history shows that balanced portfolios experience significant growth after large crises. For example, the balance of diversified assets between shares and bonds (60% shares and 40% bonds) had grown 21% after the decline of 1987 and 67% over the course of five years,» – the bank’s exports say.

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