The Effects of “Brexit” on the American Manufacturing Sector

The Effects of “Brexit” on the American Manufacturing Sector

June 30, 2016 | U.S. Manufacturing

International markets responded with shock as the results from the June 23rd referendum on Great Britain’s place in the European Union (EU), dubbed the “Brexit,” began to roll in: despite neck-and-neck polling, the final tallies showed a narrow victory for the “Leave” campaign. Just a day afterward, the effect on financial markets was already evident as the S&P 500 had fallen by 2.5% and the Dow Jones Industrial Average (DJIA) closed down 600 in response to the vague sense of panic which followed the outcome of the vote (though the DJIA has been able to bounce back somewhat in the meantime). It remains to be seen if Great Britain will actually manage to extricate itself from the EU and what other consequences, such as further referenda on Scottish independence, may result. Regardless, it is worth taking a look at any effect the Brexit may have on the American economy, given the close economic ties these two nations hold. Specifically, it will be helpful to examine the implications of the Brexit vote in the context of the strength of the American dollar, the impact the vote may have on American jobs, and any potential consequences for American manufacturing and exports in the wake of this new economic situation.

Effects of the Stronger Dollar

An early and immediate financial consequence of the Brexit vote was a strengthening of the US dollar, particularly in relation to the British pound. While such news may pique the interest of those planning a trip to Britain in the future, it is not particularly good news for American companies. After all, such a change in the currency markets likewise means that American exports to Great Britain will become more expensive, and hence American businesses will likely suffer as a result. In general, the past few years have seen the American dollar gaining in strength, and thus a harder market for American manufacturing. The past 12 months have already seen a net loss of upwards of 39,000 jobs in the manufacturing sector in the United States, and one suspects that this trend will not be helped by the loss in value on the British pound that has been a result of the Brexit. Should the American dollar continue to gain against the pound, especially in combination with the financial insecurity that has already come about, one expects American exports — and hence the American economy overall — to be negatively affected by the Brexit in the short- to medium-term.

The Brexit and the Overall Economy

That being said, it is a promising sign that while the financial markets have been negatively impacted by the Brexit, it has not set off any kind of major panic comparable to the 2008 recession. In fact, while the manufacturing sector in the United States may very well incur job losses, a stronger dollar may be good news for American consumers. On the one hand, US job growth has already been slow over the course of 2016, so there is some concern about a cutback in consumer spending exacerbating the instability that has resulted from the Brexit vote. However, even given the likely weakening of American exports, American households will see greater purchasing power on account of lower gas prices and more affordable imports resulting from the stronger American dollar. Consumer spending can be hard to predict accurately, but one can cautiously expect that the Brexit will lead to greater economic activity in consumer spending in the United States (and perhaps in housing) in the course of a shift away from manufacturing.

Good News from the Brexit?

The kind of instability that political events such as the Brexit cause is rarely a positive sign for the global economy, and hence prospects for American growth and investing have already been negatively impacted. That being said, the Brexit will likely not be completely negative for American consumers, and indeed there are a few positive outcomes that may be identified at this stage. For one, travel to Great Britain will become much cheaper for Americans considering the British Isles as a vacation destination, and this increase in tourism will likely provide some relief to a struggling British economy as well. As mentioned above, a constricting global growth market will likely mean lower energy prices as well, and hence lower gas prices for the average American consumer. These outcomes, combined with the dollar’s greater purchasing power, should be seen as a silver lining to the Brexit for the American economy.