Business / Policy Watch

UK result adds to fragility of growth

(Agencies) Updated: 2016-06-25 07:50

The pain of Britain's European Union divorce radiated around the globe on Friday, blowing up a storm in the financial markets that may take time to die down and retarding prospects for a recovery in world trade.

Sterling's fall to 30-year lows showed investors saw the British vote to quit the EU as a self-inflicted wound, but economic casualties could spread far and wide.

"The global economy was fragile before and is more so today," Citigroup Inc economists said in a report.

Markets, caught off guard by the result, pushed back the expected timing of rate rises by the United States Federal Reserve and tried to work out if the Bank of England and other central banks would ease rates to shore up their economies.

"In the real economy, global GDP is definitely going to be affected, US GDP, Japan GDP, GDP everywhere," said Bob Takai, president at Sumitomo Corp Global Research in Tokyo.

"So I think it's going to be difficult for the Fed to raise rates. No rate hikes this year and maybe the Fed is going to have to think about their whole monetary policy."

Japan, which wants a weaker yen to break free of recession, felt the impact immediately. The yen, regarded as a safe haven currency, surged past 100 per dollar to its strongest in two and a half years and stocks fell more than 8 percent during trade on Friday.

Asia's emerging markets were also hit hard, with stocks and currencies falling.

China's yuan slumped to its lowest in more than five years, with the central bank thought to be intervening to sell dollars.

"From an investment perspective it's the last thing the global economy needed because of the uncertainty that it's going to add in to what's already been a volatile year," said Savanth Sebastian, an economist at Commonwealth Securities Ltd in Sydney.

The yen's gains intensified the concerns of Japanese policymakers, who want a weaker currency to support exports and their deflation-hit economy.

So far, Japan has been unable to garner support from other major countries, most notably the US, for intervention to weaken the yen.

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