World Economy

After Brexit Vote, Focus Turns on Global Growth

After Brexit Vote, Focus Turns on Global GrowthAfter Brexit Vote, Focus Turns on Global Growth

Over the past couple of weeks the world economy has been captivated by the UK's vote to leave the European Union.

The Brexit was named as the culprit of global stock markets rise, fall, and rise. It wreaked havoc on currencies. Sterling itself fell to a 31-year low. By all appearances, it was the reason for the sudden resurgence in gold, Bob Bryan wrote for the Business Insider.

The thing is, Brexit is just the first in a series of geopolitical events that will be the focus of global markets for months to come. Basically, the economy isn't about the economy anymore.

For instance, Byron Wien, the investing guru and vice chairman at Blackstone, released his quarterly update Thursday. Topics included at the beginning of the note were: the US presidential election, Brexit and the EU's reaction, fear over immigration and ethnic clashes.

Nothing on corporate earnings or stock valuations, and he only brings up inflation halfway through the 2,141-word letter.

While Wien is probably a bit of a special case, he tends to be a bit broader in his outlooks, non-economic themes have been the refrain from a number of economists and Wall Street analysts.

Essentially, it's the idea of "decent fundamentals, but heightened geopolitical risks." This thinking showed up in a significant number of commentaries following the Brexit vote.

For instance, here's Ebrahim Rahbari, Willem Buiter, and Cesar Rojas from Citi's Global economics team:

"The global economic outlook for H2 2016 is characterized by two opposing forces: on the one hand, activity appears to have rebounded from the weakness in Q4-Q1 and leading indicators suggest some further firming ahead. On the other hand, the Leave outcome in the UK’s referendum on EU membership has sent shockwaves through financial markets and the political establishment in many countries and raises the risk of a renewed economic slowdown and financial market volatility."

Brexit Shocks

The economics team at Bank of America Merrill Lynch still expects slow but steady economic growth in the US going forward, but they said the "uncertainty" related to outside shocks poses the largest risk.

"There is a long list of other factors that can add to the shock from Brexit," wrote the BAML team.

"High on the list is the US election. We wrote in the election and the economy, contentious rhetoric can hurt confidence and cause companies and investors to adopt a wait-and-see approach. This risks hampering economic growth this fall."

The Global Macro team at Morgan Stanley echoed more of the same.

"After the surprise vote of the UK to leave the European Union and the global financial market turbulence that followed, it has become clear that political uncertainty in Europe is creating negative spillovers for the rest of the world.

"The size of these spillovers will depend on the long-term political reaction rather than the short-term central bank response, we think."

Outside of just Brexit, geopolitical events have weighed on assets throughout 2016 already. Oil prices have been a huge focus for 2016, and much of the action that has impacted supply dynamics and lead to higher prices have been geopolitical disruptions.

Going forward, some of these instances will be expected, such as elections in Italy and the US, and OPEC's upcoming meetings. Others, like the oil supply disruptions in Canada due to a wild fire earlier this year, will come out of nowhere.

To be clear, it's not to say that these events won't impact the economy in some way. The Brexit will have notable effects on trade in the European Union and the price of goods in the UK, but it was first and foremost a political vote rather than, say, economic data or company earnings.