Brexit, Stage Right: The Effects on the Transportation Industry
Under normal circumstances I very seldom concern myself with things that happen across the pond in Europe or even in Great Britain. However, what transpired on June 23, 2016 cannot in any way, shape, or form be considered normal circumstances.
On that day Britain voted to extricate themselves from the European Union, and in doing so, may have they set off a global firestorm. Before I highlight the possible Brexit consequences, allow me to identify the two major arguments that were critical for the initial creation of the European Union in the first place.
It was an agreement that was designed and implemented that created a single borderless market among its members in Europe and the United Kingdom.
It is also an agreement that creates a single currency among 19 of its members. (The United Kingdom and eight other EU members did not joint the eurozone.)
So what are the consequences and immediate effects of Brexit? To get a handle on this let’s first take a look-see at what the Organization for Economic Cooperation and Development predicted at their last meeting, which took place on June 1 of this year. Note that this was a mere three weeks before Brexit became a reality, a reality that must now be dealt with.
So, their crystal ball predicted the following: that the global economy would grow at three-percent clip, that the UK would grow at a 1.7-percent rate, and that the remaining EU countries (using the euro currency) would grow at an even lower rate of 1.6 percent. Whatever the long-term consequences of Brexit may be the immediate effects of Brexit have been adverse, at least in the short term.
An initial downturn in the European stock markets has harmed consumer spending. Multinational companies are taking a delayed approach to new investment opportunities as they analyze whether or not the UK remains a viable export/import partner because of Brexit. Multinational banks are also re-evaluating their London operations, which has become Europe’s financial center. Several banks and lending institutions have already announced that they may be shifting future expansion to cities other than London, and indeed, there have been reports that some companies have announced plans to shut down London operations. This leads to employment reductions, higher unemployment, etc.
And our friends and economists at Morgan Stanley are “pessimistic about the immediate outlook.” Brexit will “likely trigger a downturn, if not a recession, in Europe,” they write.
Concerns about the euro breakup could possibly cause financial conditions to tighten which could lead to higher interest rates and to slower than predicted growth.
With this as a backdrop, what will Brexit might mean for the transportation industry in the United States? Economists argue that the United States will not be able to escape the negative fallout from Brexit. They believe that the most likely scenario would be a sort of double whammy of export/import ramifications, and not in a good way. If because of Brexit, Europe finds itself in recession mode, experts believe that it would weaken as an export market. As the Brexit recession continues to manifest itself, it would stand to reason that there would be a reduction in demand for imported goods from the United States. As a consequence to this, our country would realize a decrease in imports from Europe as well as decreased exports to Europe as demand will be repressed due to the Brexit recession. If this occurs, it will most definitely have a negative impact on our transportation industry, both the international market, and the domestic market as well.
Not to be all doom and gloom, Neal Shearing of the Capital Economics consulting firm did observe that there were no signs of panic capital outflows from emerging markets. As he stated, “Following the initial shock of the Brexit vote, financial markets in (emerging markets) are starting to stabilize.” A very good sign indeed.
There are two main risks from Brexit for U.S. transportation market, according to a report from FTR Transportation Intelligence. “First, Brexit increases the risk of a recession in Europe above the worrying 50-percent probability. A European recession is worth about -1-percent growth in the U.S. economy through a variety of levers. Since the forecast for GDP growth this year is only 1.8 percent, Brexit could lower that growth by more than half.
“We know from history that GDP growth below one percent causes a shrinkage of truck freight,” the report went one to say.
The second risk is that Brexit could kick off a banking crisis in Europe that would increase interest rates in the U.S. “That would clearly push us into a sharp recession with truck freight shrinking by five percent or more,” said the report. “Some economists put the chance of recession in the U.S. over the next 12 months at 35 percent. Brexit clearly ups that to near 50 percent.”
Vince Castagno is client solutions manager at Integrated Distribution Services.
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