Fra Commerzbank:
Many economists have sharply lowered their forecasts for Germany and the euro zone after the British vote to leave the EU. But there is scant evidence so far of the wider uncertainty shock that has frequently been mentioned.
Of course, weaker economic growth in the UK as an important trading partner will be felt in Germany and across the euro zone but the effect is likely to be much weaker than many forecasts presently assume. After the surprising outcome of the Brexit referendum, many economists now fear negative consequences for the euro zone.
Some have lowered their 2017 growth forecasts for Germany and the euro zone by more than 0.5 percentage points, which is usually only the case after surprisingly bad data releases e.g. bad GDP figures (see chart 1). Their reasoning is the greater uncertainty amid the forthcoming Brexit; some even speak of an uncertainty shock.
Uncertainty shock is the buzzword … Economists have agreed for some time that increasing uncertainty dampens the economy, and especially corporate investment. However, the term “uncertainty shock” only began to gain wide currency after the Lehman Brothers bankruptcy. Since then, uncertainty shock has been used to describe an unforeseen event.
Shocks comparable with Lehman are very rare though and an uncertainty shock has been only threatened once since Lehman’s, at the peak of the European sovereign debt crisis when there were fears that the Monetary Union would break up. … but there are no signs of this yet in the euro zone
There is no question of a prolonged global uncertainty shock on the financial markets, which are normally quick to respond; the situation here has calmed considerably. Our ARPI² indicator for global risk perception is close to zero again, signalling “normal” uncertainty (chart 2).
And directly after the Brexit vote, it rose only slightly and by less than at the beginning of the year in the wake of the Chinese equity crash, or after the disappointing US labour market data for May. A steep permanent rise such as after the Lehman bankruptcy or during the sovereign debt crisis is not evident. At the same time, stock indices like the DAX and Euro Stoxx have virtually returned to their level before the vote and the FTSE 100 is actually above it.
Fewer exports to UK likely, but no slump Thus, financial markets seem to have overcome the initial Brexit shock. But what about the real economy? It can be assumed though that at least from the perspective of British companies, uncertainty has increased as Brexit could make access to their main foreign market, the rest of the EU, more difficult. Some businesses are therefore likely to defer investment in the UK and the economy could contract in the second half of the year.
