Direct impact of Brexit on Asia Pacific economies likely to be limited, output growth to slowdown

A significant investor risk aversion and volatility in the financial market has been set off following the Brexit decision. The consequential implications on the economy are still quite uncertain. However, it is evident that business sentiment has been crushed globally. This is likely to adversely impact economic growth momentum and investment appetite. Under such a scenario, attempts of policymakers to restore market sentiment in the following weeks will be an important factor in determining global outlook, said Scotiabank in a research report.

As advanced economies have quite limited room to react to the shock as compared to earlier crises, economies of Asia-Pacific are in a better shape in terms of fiscal as well as monetary policy space. Under the assumption that market turmoil will not deepen further, the economic contagion to the Asia-Pacific region might be controlled to a larger degree by swift policymaking, noted Scotiabank.

The direct impact of UK leaving the EU is expected to be limited even if it led to a considerable weaker UK economy, given that the UK buys just 2.3 percent share of Asia Pacific’s goods exports. New Zealand is expected to feel the biggest trade impact, along with India, Vietnam and Hong Kong. However, these nations export just 3 percent to 4 percent of their total exports to the UK.

In the mean time, Indonesia and Singapore ship below 1 percent of their total exports to the UK. However, there is likelihood for a larger trade channel impact if the confidence shock results in Europe to fall into recession, as it buys more than 17 percent of Asia-Pacific’s exports. Furthermore, negative economic conditions in the UK and the entire Europe might negatively affect FDIs into Asia-Pacific region in the medium-to-long term. This is because the EU is a considerable source for investment flows, added Scotiabank.

The biggest impact on the Asia Pacific economies is expected to come from huge confidence shock. This is seen by the large amount of currency depreciation bias throughout regional emerging nations and an equity market sell-off. Volatility has urged central banks such as BoK and RBI to intervene in a bid to curb weakness in currency.

In the mean time, other central banks in the region have released statements emphasizing that they are keeping a close watch on the developments of financial market and are prepared to give further liquidity to the banking system if required. The flip side of the heightened risk aversion is that safe haven flows have resulted in the Japanese yen to appreciate against the US dollar and all regional currencies, stated Scotiabank. Appreciation in the JPY is expected to deepen the deflation issue in the months to come and also add to the problems faced by Japan’s exporters. The Bank of Japan is likely to ease its policy in the near term, mostly in July, added Scotiabank.

The global shock in sentiment is expected to lead to spillover effects into Asia’s real economy, resulting in deceleration of output growth. There is likelihood of cutbacks in hiring and business spending, leading to higher unemployment and subdued consumer spending. In order to offset this negative situation and underpin domestic demand, authorities throughout Asia-Pacific are expected to reveal additional fiscal stimulus, according to Scotiabank. Moreover, with the increasing expectations of the US Fed to postpone hiking rates and given the lower commodity prices, several Asia-Pacific central banks are expected to add additional monetary stimulus in their economies in the months to come, said Scotiabank.