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Saturday, 25 June 2016 04:09
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Even before Brexit, global trade had slowed a lot and OECD recovery seems a long way off


It is too early to say just how badly the UK economy will be hit by Brexit—or the secondary impact on Europe if others decide to follow Britain’s example—and how long it will take to recover, but the 8% fall in the pound on Friday will further hit both the stuttering US economy and global growth. Though Fed chair Janet Yellen spoke of Brexit as one of the reasons for holding her hand on interest rates, it is doubtful if she would have raised rates even otherwise. The US economy continues to fire on one or two engines, which is why each time the Fed gives a projection, it is to lower growth – in December 2014, its projection for 2015 growth was 2.7% and 2.6% for 2016; it is now 2% for 2016. Nor is this unique to the Fed. The IMF forecast a 3.9% growth for the world for 2015 in April 2014 while the actual was a much lower 3.1%—the 2016 forecast was 3.8% in April 2015 and was lowered to 3.2% this April.


The problem gets worse when it comes to trade. In the glory days of 2004-07, when global GDP was growing at around 5% per annum, the global exports trade was growing at roughly double the pace at 9-10%. Over the past 3-4 years, however, this relationship has broken down and, in some years, global trade has grown slower than GDP. The slowdown in both growth and trade, coupled with increased migration, of course, was the trigger for Brexit—except, Brexit may have made things worse while, ironically, larger migration may have triggered an economic revival in not just the UK, but all of Europe.


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