June 29, 2016

Brexit to boost U.S. exports to Asia, depress activity to Britain and Europe, economist says

Ratajczak says Fed to remain on hold until dollar's appreciation slows.

By DC Velocity Staff

Britain's decision to leave the European Union is a mixed bag for U.S. companies, according to one of the nation's leading economic forecasters. The U.S.' stronger export position in Asia due to the post-Brexit rise in the value of the Japanese yen will be offset by weakness in U.S. exports to Europe, as declines in the euro and the British pound make U.S. exports to Europe less competitive, said Dr. Donald Ratajczak, the Regents professor emeritus of economics at Georgia State University.

In the wake of Britain's decision last Thursday, traders and investors tapped the yen as the primary safe-haven currency, Ratajczak said. This, in turn, drove up the yen's value against the U.S. dollar, making U.S. exports more price-competitive. Conversely, the pound fell to its lowest levels against the dollar since 1985, and the euro dropped significantly as well following the vote.

Speaking Tuesday before the SMC3 Connections 2016 conference in Chicago, Ratajczak said that although U.S. companies should not take a significant hit on their capital costs, the same is unlikely to be said for European companies. An already-struggling European economy may take a further hit from the lingering uncertainty, he said.

Ratajczak said any near-term plans by the Federal Reserve to hike interest rates have been tabled due to last week's developments. The Fed will not hike its benchmark federal funds rate—the rate charged by banks for overnight borrowing—until the dollar's value cools. He forecast no more than one rate hike this year, and one more in 2017.

Ratajczak forecast U.S. gross domestic product to grow 2.5 percent in the second and third quarters, and between 2.25 and 2.5 percent in the fourth quarter. Ratajczak initially forecast 3-percent GDP growth in the third quarter, but shaved it by 0.5 percent due to the impact of Brexit.

Crude oil prices, which traded Monday at $46.33 a barrel on the New York Mercantile Exchange, may drift down to around $45 a barrel in the near term, but then gradually rise as oil markets realize that Saudi Arabia cannot pump out as much crude as its government originally predicted, according to Ratajczak. However, he said it was wishful thinking to believe oil could climb to $70 a barrel either this year or through 2017.

Ratajczak said the impact of elevated inventory levels would be a 0.8-percent drag on GDP in the second quarter, as the supply chain continues to draw down existing stocks rather than boost purchasing. The economist took issue with the notion that high inventories are the result of too much product in the pipeline, saying that the problem lies with the fact that there are too many stores. Department store inventories have begun to decline only in the past two months, he said.

Ratajczak is a staple at the two annual SMC3 conferences. The winter event is held each January in Atlanta, while the summer event is held in June at different locales around the country.

For more on the Brexit, see "As Europe, world reel from Britain's vote to leave EU, concern turns to 'Nexit.'"

Resources Mentioned In This Article

Strategy Videos

Join the Discussion

After you comment, click Post. If you're not already logged in, you will be asked to log in or register.

Subscribe to DC Velocity

Feedback: What did you think of this article? We'd like to hear from you. DC VELOCITY is committed to accuracy and clarity in the delivery of important and useful logistics and supply chain news and information. If you find anything in DC VELOCITY you feel is inaccurate or warrants further explanation, please ?Subject=Feedback - : Brexit to boost U.S. exports to Asia, depress activity to Britain and Europe, economist says">contact Chief Editor David Maloney. All comments are eligible for publication in the letters section of DC VELOCITY magazine. Please include you name and the name of the company or organization your work for.