Thanks to Brexit, the French may not buy as many American pharmaceuticals this year. Germans probably won’t buy as many Japanese printers. It’s the best time in recent memory for a non-Brit to drive home a new Jaguar, but no one in Britain should be too excited about that.
Britain’s vote to leave the European Union has shocked the global economy in an unusual way, unleashing a currency war in which all sides appear likely to lose.
In the aftermath of the June 23 vote, the value of the British pound has plummeted. The U.S. dollar and the Japanese yen have surged. And unlike in normal times, when at least one of those moves would signal faster growth to come, all three countries are bracing for currency-driven slowdowns in their economies.
The turmoil in foreign exchange markets since Brexit exemplifies a new world order. A strong currency used to be the hallmark of an advanced economy, a symbol of financial stability and international influence. Developing nations took advantage of their currency’s weaker status to export their way to economic success.
But now, those rules no longer apply. The United States and Japan are bemoaning the strength of their currencies, while emerging markets such as Brazil are trying to prop theirs up. Britain suddenly finds itself in a similar boat to many developing nations, less concerned with how a weaker currency might boost its export sectors and more with the faltering economic prognosis that is driving investors away from the pound.
The U.S. dollar has jumped 3 percent since the vote last week, capping off a whopping 25 percent climb from mid-2014 to spring 2015. Those substantial gains have made U.S. exports less competitive overseas, dimming a sector that had been a bright spot in the nation’s economic recovery. An analysis by the Federal Reserve Bank of New York estimated that a 10 percent rise in the value of the dollar can slow the U.S. economy by half a percentage point.
For the first half of this year, U.S. manufacturing exports to four of the country’s five largest trading partners have fallen. The only source of export growth in that group had been Britain. Now, the rapidly depreciating pound will make it much harder for British consumers now to buy American goods such as aircraft parts and computers.
“It’s just one more headache for us to really face,” said Chad Moutray, the chief economist for the National Association of Manufacturers in Washington. “You add more uncertainty to the overall mix, and to the extent the dollar strengthens, that makes it more challenging for us to grow our international demand.”
Even before Brexit, an array of American businesses including Oracle and Costco were feeling the weight of the greenback. The analytics firm FactSet forecast that businesses in the S&P 500 that rely on foreign markets for the majority of their revenue will report a nearly 10 percent decline in profits for the second quarter — nearly twice the figure for companies whose sales are primarily domestic.
In Japan, Brexit has caused the yen to strengthen more than any other major currency. The Nikkei 225 stock index fell last Friday more than any index outside of Europe, its worst drop in five years.
In the 24 hours after the British vote, Japan lost nearly the same amount of wealth as after the 2011 nuclear meltdown that threatened to leave a wide part of the country uninhabitable. (The Nikkei bounced back a little Monday, rising 2.39 percent.)
The yen tends to strengthen whenever investors worry about the world’s path. And Japan, to put it bluntly, does not want a strong yen — and may be out of tools to weaken it.
Japan has spent the past several years using every last policy tool just to keep its currency as weak as possible.
Well before the British vote, the Bank of Japan was on an unprecedented bond-buying binge. Interest rates were already negative. And for all this, Japan had earned itself an unsatisfying half-recovery in which wages were stagnant and growth was flat — but at least its export-heavy titans were raking in record profits. The Nikkei between 2012 and 2015 had been one of the world’s fastest-growing stock markets — the one economic achievement for Prime Minister Shinzo Abe, who had pledged to pull Japan out of its two-decade stagnation.
But Japan earned that recovery by making a risky bargain: Its central bank was using crisis-time tools during a period of relative tranquility, meaning it had little in its pocket to combat the next crisis.
“Now, there’s not much the Bank of Japan can do” to help the situation, said Takuji Okubo, the chief economist at Japan Macro Advisors in Tokyo. “We could argue that the Bank of Japan has nearly exhausted its means to ease monetary conditions.”
Because Japan is such a big exporter, many of the nation’s corporations — think Toyota, Mitsubishi and Toshiba — receive the bulk of their income in foreign currency. When the yen gains, their profits are eroded. Take the example of Toyota, which makes cars at several major plants across the United States.
On the morning of the Brexit vote, $1 million earned in the United States would be 106 million yen back home. Twenty-four hours later, that same $1 million had the value of 102 million yen.
The strengthening of the dollar, meanwhile, figures to ripple even further through global markets. Recent research co-authored by David Beckworth of the Mercatus Center at George Mason University found that countries that link their currencies to the dollar — either explicitly or implicitly — account for about 40 percent of the global economy.
China is one of the prime examples. Because the yuan is loosely pegged to the dollar, the surging greenback has complicated Beijing’s attempts to cushion the slowdown of its economy as its transitions from relying on exports to catering to domestic consumers. On Monday, China’s central bank reportedly lowered its target for the yuan’s value against the dollar — effectively weakening its currency — as it tried to mitigate the fallout from Brexit. It was the biggest move since government officials devalued the currency last summer.
That weakening is a blow to several major Japanese industries, including manufacturers of cars, LCD displays and circuit chips, all of which sell briskly in China.
“By itself, maybe Brexit wouldn’t be so bad for the global economy,” Beckworth said. “But Brexit was done in the middle of a toxic economic soup.”
The dollar is also the denomination of choice for a rising amount of debt held outside the United States. In 2000, that debt totaled just over $2 trillion. The most recent data from the Bank for International Settlements shows it has nearly quintupled, reaching nearly $10 trillion at the end of last year.
The explosion in dollar-denominated debt around the world means that paying off those loans becomes more difficult for foreign borrowers as their own currencies fall in value relative to the greenback. Roughly a third of that debt is concentrated in emerging markets.
In Britain, there are worries that the rapid fall of the pound will spark faster inflation. The bigger worry is that it reveals a fast-spreading weakness in the British economy.
“For the U.K., this creates enormous uncertainty, but it also is a fundamental change in their competitiveness. And I don’t think even the very large fall in pound sterling that we’ve seen is going to be enough to make up for that,” Adam Posen, the president of the Peterson Institute for International Economics, said in Washington on Friday. “They had a role in Europe as a financial center, and even almost more importantly as a beachhead for foreign companies, particularly U.S. companies wanting to export into Europe. And that’s frankly going to go away.”
The pain has already manifested itself in one storied British institution: It is now suddenly less lucrative to win the Wimbledon tennis competition. Since Friday, the value of the top prize in the men’s and women’s singles tournament, now underway, has dropped by some $350,000.
Harlan reported from Seoul. Max Ehrenfreund in Washington contributed to this report.