Fleet Management

Commentary: In Search of the Bright Side Following "Brexit"

August 2016, TruckingInfo.com - Editorial

by Evan Lockridge, Business Contributing Editor - Also by this author

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Photo: Vaughan Leiberum/ CC BY 2.0
Photo: Vaughan Leiberum/ CC BY 2.0

When I started writing this month’s column, my working title was “Don’t Fear The ‘Brexit.’” But after researching the topic I realized it was more complex than that.

Opinions vary about the effect on the U.S. of the surprise June vote by residents of the United Kingdom to leave the European Union, but you should be aware of some of the potential ramifications.

While the U.K. is the world’s fifth largest economy and the second largest in the European Union, its gross domestic product is much less than to U.S. or its trading partners Japan and especially China.

The “Brexit” will be a mixed bag for U.S. companies, says one leading economist. Donald Ratajczak, regents professor emeritus of economics at Georgia State University, told attendees at a supply chain meeting in Chicago that U.S. exports to Japan are in a stronger position following the vote due to a rise in the value of the yen. But as DC Velocity reported, he said they’re expected to be offset by weaker U.S. exports to Europe, thanks to declines in the value of the euro and British pound. However, he also warned Japan is likely to hit a recession next year. The ultimate result could be less truck freight moving to U.S. ports.

The value of the U.S. dollar following the “Brexit” vote is getting stronger as investors are now more attracted to it, seeking safer havens for their money than the British pound or the euro. That makes it harder to sell product in not just the U.K. but in all of the European Union.

Noel Perry, senior transportation economist at FTR, said there are two main concerns for U.S. transportation markets. One, the “Brexit” vote increases the risk of a European economic recession. That could shave a full percentage point of U.S. GDP growth, which many are projecting at around just 2% or a little less this year. That, of course, “causes a shrinkage of truck freight,” but there’s an even bigger concern.

“Brexit could kick off a banking crisis in Europe that would increase interest rates in the U.S.,” which would likely push the U.S. into a recession. If that happens, he says, expect truck freight shrinkage of 5% or more.

Others are more upbeat. Bob Costello, chief economist at the American Trucking Associations, told me he generally doesn’t see a huge impact on the U.S. economy or trucking.

“In the short term, it will have an impact on the economy through monetary policy,” he explained. “The Bank of England is likely to cut interest rates further for concern that the vote will slow the economy or even put it into recession. Likewise, the European Central Bank is likely to keep negative interest rates.

“Conversely, while I don’t believe that the Federal Reserve will increase interest rates this summer, they could do it as early as September. That will put more upward pressure on the dollar, hurting manufacturers, although the flip side is that it would likely increase imports.”

The good news? No disrespect to these fine gentleman mentioned in this story, but these are only opinions. Yes, it’s some of the best-darned expert analysis out there, but as you can see, even the best experts don’t agree.

While external factors can force the U.S. into a recession, let’s all remember any economy, even the entire worldwide one, is affected by many different factors. As Costello said, longer term, the Brexit’s effect on the U.S. and trucking “depends on many factors, including renegotiating trade agreements, so it is difficult to say.”

Comments

  1. 1. FactChecker [ August 18, 2016 @ 05:14AM ]

    What is the evidence that the dollar is gaining strength vs. the euro since Brexit?

    Yesterday's exchange rate was 1.13 USD/EUR which is not far off the 365 day low of 1.15 USD/EUR last August, and exactly the same as June 22 (the day before the Brexit vote). The dollar was stronger last year - peak in November (1.06 USD/EUR) with decline starting in mid-February. Since Brexit, the value has varied between 1.10 and 1.13 USD/EUR (neither a peak or valley for the year).

 

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