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The Brexit recession no longer looks so certain

IMF chief economist on world markets

Brexit apparently wasn't what it was cracked up to be.

Rather than the major disruptive factor to the global economy and financial markets that was expected, the decision by Britons to exit the European Union has had a decidedly muted effect.


  • The International Monetary Fund, in what some considered a significant change of stance, said this week that Brexit likely would not put an additional major dent into the already slowing global growth picture.
  • Stock averages in the U.S. have notched a string of record closes, and commodity, currency and bond markets all have returned to a sense of relative calm after the sharp reaction that immediately followed the vote. Moreover, about 1 in 6 new hedge funds that opened in the second quarter were focusing on opportunities in Europe.
  • Perhaps most surprisingly, there's optimism that the appetite for deals in the U.K., after slumping in the second quarter, could rebound now that the Brexit smoke is clearing.

"People view the post-Brexit uncertainty and how it's going to shake out as just another uncertainty in the market, but not one that's going to take precedence over a lot of other issues," Andy Wilson, U.S. head of the U.S.-U.K. M&A Deal Corridor at Deloitte, said in an interview.

"The U.K. and U.S. are sophisticated markets," he added. "Sure, there are going to be lots of details to hammer out, but everyone is fairly certain they're going to get hammered out in a way that's not going to disrupt the economies of the major players."

First-half activity, particularly in deals targeted for the U.K., declined precipitously after several years of strength. Deal dollar volume tumbled 47 percent from the first quarter, with the $50.1 billion of total inbound deal activity representing a decline of 66 percent from the same period in 2015, according to data tracker Dealogic.

Pedestrians walk in the rain at the Canary Wharf business district in London.
Eddie Keogh | Reuters

Deloitte expects that higher borrowing costs and somewhat tighter conditions could put a crimp on activity going forward, but it also expects that the pound's decline against the dollar, resilient U.K. institutions and a good relationship with the U.S., particularly in the technology sector, will propel activity. Wilson said 10 to 20 percent deal growth would be a reasonable rate.

In fact, Wilson said a recent client meeting he had in the U.K. showed that business leaders already had put Brexit at least somewhat behind them.

"To be honest, some people, when I spoke in London, had already moved on from Brexit to be more concerned about what was going to happen around the U.S. election cycle than they were on the details of how Brexit would play out," he said. "The reality is now they're moving on to think about what's the next big uncertainty out there."

That's likely because the big economic slide that Brexit was expected to cause now looks less likely.

The IMF this week revealed that it had downgraded growth globally and in the U.K., but to nowhere near the recession levels it had been forecasting in June. The organization warned that the vote to leave would shave 5.5 percent off U.K. gross domestic product, a projection that no longer appears to hold.

Though revised lower from the last projections in April, the U.K. is expected to grow 1.7 percent in 2016 and 1.3 percent in 2017, which are respective downward revisions of 0.2 percentage point and 0.9 percentage point. Global growth was knocked down 0.1 percentage point for both years, to 3.1 percent and 3.4 percent, numbers that were down 0.5 percentage point from year-ago forecasts.

In the U.S., the impact is expected to be even less.

"The impact of Brexit is projected to be muted for the United States, as lower long-term interest rates and a more gradual path of monetary policy normalization are expected to broadly offset larger corporate spreads, a stronger U.S. dollar, and some decline in confidence," the IMF said in its projections.

Investors have noticed. Besides the stock market rally, hedge funds have been diving into European-focused strategies.

In fact, 16 percent of new funds launched in the second quarter employed strategies focused on the region, according to industry tracker Preqin. The norm is just 1 percent, so the gain represents expectations of lively markets where volatility will present opportunities.

"Although Europe-focused funds did not make the same gains as North America- or Asia-Pacific-focused vehicles in Q2, the ongoing volatility arising out of the uncertainty within Europe may provide opportunities for hedge funds focusing on the region to deliver some upside gains," said Amy Bensted, head of hedge fund products at Preqin.