Direct economic impact of Brexit on APAC region is small
Klaus Baader, Head of Research, Asia Pacific, comments on Brexit and the impact it has on the Asia Pacific region.
The direct economic impact of Brexit on the APAC region is small. Trade links to the UK play only a minor role: the average share of the region's exports going to the UK is only just over 1% for the majority of south-eastern and north-eastern Asia. Among south-east Asian economies Vietnam is a notable exception with the UK accounting for some 3.5% of exports. However, western Asia is considerably more exposed, with an average of some 6.5% of exports from India, Pakistan, Sri Lanka and Bangladesh destined for the UK.
Our estimate of the impact on UK growth of Brexit – with all the uncertainty this involves – is a reduction of economic growth of 0.5-1.0pp per year over the next decade. In other words, by 2018, we expect UK GDP to be 1.6pp lower relative to base. Hence, overall, the trade shock on the APAC region is likely to be small at less than 0.1%.
Drag on the euro area
But Brexit is not only a negative economic shock to the UK, it will also exert a drag on the euro area, amplifying the effect on Asia. Yet by our estimates, the reduction in euro area growth will be just 0.1-0.2pp per year, meaning that by 2018 we expect euro area GDP to be lower by 0.3pp relative to base. For the EU as a whole, therefore, economic growth is likely to be cut by 0.2-0.3pp per year. Given that the EU is the destination of an average of around 10% of exports from the region – though with large variations ranging from 5% in Australia to 18% in Vietnam – the effects will not be negligible, but small. We have therefore reduced our growth forecasts for key regional economies by 0.1pp in 2017 and 2018. For Asia's largest economy, China, we have maintained our growth forecasts, believing that a small fiscal expansion is likely to be sufficient to offset the negative hit to growth.
Indirect effects on the APAC region
That said, there may be indirect effects on the APAC region. A lasting uncertainty shock could develop, which would tend to depress business investment worldwide, though quantifying this effect is at this stage impossible. A freezing up of financial markets – which would be the most dangerous fallout - looks at this stage highly unlikely, simply because the UK is too small a part of the global economy (it accounts for around 2.4% of global GDP), and because central banks stand ready to provide liquidity as needed.
The economy in Asia that will in our view experience the largest negative shock from Brexit is Japan, not because of direct trade links (1.7% of Japan's exports go to the UK), but because the Japanese yen's role as a safe haven currency. This has cause a notable appreciation of the exchange rate, and we have marked down our 2017 GDP forecast by 0.4pp. However, because we predict some additional monetary stimulus and a sizeable fiscal stimulus from Japan's policy makers, we still expect a notable improvement in Japan's growth rate to 1.2% in 2017.
Head of Research, Asia Pacific at Societe Generale