Last week, Great Britain voted to leave the European Union – otherwise known as “Brexit.” For all of the talk surrounding one of the most monumental changes to the global economy since the financial crisis of the late 2000s, little has been said about its impact on the U.S. ARM industry.

The most apparent effect of Brexit thus far has been the drastic decline of the British Pound, which reached its lowest levels in 30 years on Friday. The British Pound plummeted by nearly 10% since June 23, dropping from about 1.48 to 1.32 as of Monday morning. This plunge should continue as hysteria envelops the rest of the EU’s economies.

Kaulkin Brexit chart 6.28.16

Some economists and financial advisors believe Britain’s economy is strong enough to endure on its own following Brexit. However, the rest of the EU is sure to feel ripple effects:

  1. How will the rest of the EU function without its second largest economy?
  2. Will Brexit lead to other EU nations, such as Greece, Italy, and France, exiting the EU as well? Greece, for example, probably couldn’t survive on its own following its extreme bankruptcy and recent economic troubles.

Kaulkin Brexit chart 2 6.28.16All of that being said, Britain can’t actually leave the EU for another two years per Article 50 of the Treaty on the European Union. For this reason, consumers shouldn’t jump to any conclusions as there will be many negotiations over the next 24 months between Britain – or perhaps just England depending if Scotland and other members leave the United Kingdom – and the EU.

Ultimately, Brexit may have both positive and negative effects on the U.S. ARM industry:

  • If prolonged global stock market volatility continues, U.S. consumers may become fearful and spend less – leading to slower economic growth. Although consumers won’t necessarily be losing jobs or money as they did during the Great Recession, they won’t be accumulating as much debt because they’ll cease current spending habits. This will hurt ARM.
  • However, Brexit forced the Fed to reconsider its strategy to raise interest rates. Throughout the first half of 2016, interest rates remained historically low and the Fed refused to raise them preceding Brexit. The Fed probably won’t raise them following Brexit because it may lead to slower economic growth. Instead, the Fed will have to maintain low interest rates until it can see how the U.S. economy endures this volatility. With regard to the ARM industry, as low interest rates persist, borrowing remains cheap and consumers are more inclined to take on loans and accumulate debt.

It’s difficult to fully comprehend Brexit’s effect since it won’t happen for at least two years. Nevertheless, ARM industry leaders should monitor the EU and U.S. economies, as this event could become a catalyst for further economic disruption.

1Gathered from the International Monetary Fund, World Economic Outlook Database, October 2014.

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