WASHINGTON—The United Kingdom’s historic vote to leave the European Union should not have any long-term negative effects on the U.S. economy and on credit unions, but in the short term expect market volatility and increasing deposits, say CU economists.
The decision, too, may push down U.S. interest rates and lead to a mini refinance boom, one economist is predicting.
“Our outlook for credit union financial operations is essentially unchanged compared to our view prior to the Brexit vote,” CUNA economists explained in a statement. “Credit union members are likely to be a bit more cautious initially and some credit unions will likely see above-normal flows into savings accounts. However, our view still calls for double-digit growth in credit union loans in 2016, healthy earnings and improving asset quality.”
Short term, CUNA economists predict pronounced volatility in the U.S. financial market, and a stronger dollar vis-à-vis the British pound and the Euro.
“The exit of the U.K. from the EU will have a negative effect on the U.S. economy. The U.K. is the seventh-largest trading partner of the U.S. Last year our exports to and imports from the U.K. stood at $56.4 billion and $57.8 billion, respectively. That’s 3% of our total trade. This year, U.S. exports to the U.K. totaled $18.4 billion and imports was $17.4 billion,” CUNA’s economic team explained.
“The appreciation of the U.S. dollar affects our trade not only with the U.K. but also with other countries. In recent weeks we have seen a drop in the 10-year U.S. Treasury yield. As uncertainty in the EU area rises, demand for risk-free financial assets will rise causing yields to drop even lower,” the group added. “This morning the 10-year U.S. Treasury yield was down 1.5%. We can expect an increase in financial inflows into the U.S. as a result of uncertainties in the Euro area.”
Brexit would cause the recent trend of depreciating dollar and rising oil prices—both a boon to the recovering U.S. economy—to reverse to some degree, CUNA shared.
“Fortunately, U.S. economic fundamentals remain stable despite continued modest economic growth. CUNA economists believe Brexit will have little effect on U.S. economic fundamentals. The adverse short term effects, however, will eventually diminish as investors get a better handle of market reaction to the Brexit, and plans on U.K.’s disassociation with the E.U. becomes concrete, the process of which takes two years,” CUNA stated. “In the medium to the long-term Brexit should benefit the U.S. economy assuming that our trade relations with the U.K. is enhanced.”
CUNA Mutual Group Chief Economist Steve Rick told CUToday.info that Brexit could increase worries that other countries may also choose to exit the 28-member European Union.
“This will reduce the flow of investment into the U.K. and increase capital flows into the U.S.,” Rick said. “The value of the dollar would rise vis-à-vis the British pound and U.S. interest rates would decline. The drop in U.S. interest rates, for example the 10-year Treasury interest rate, would push mortgage interest rates even lower. This would create yet another mini refinance mortgage boom at financial institutions as homeowners rush to lock in near historic low interest rates. Moreover, the heightened level of uncertainty could slow investment and economic growth across Europe and worldwide. This would push down U.S. stock prices, but increase U.S. bond prices.”