Shock Enough To Unsettle Global Economy

So you are thinking about heading to Europe for your next snowboarding holiday. Britain’s recent decision to leave the European Union has sent a shock wave around the world’s financial markets. The Australian economy faces a big test of it’s resilience against a fresh wave of global market fear unleashed by the Brexit vote say prominent economists.

While the nation is unlikely to suffer directly from Britain’s decision because it has become a relatively minor destination for Australian exports, much will depend upon whether households and businesses react to the sudden uncertainty by slashing spending. It is one of those shocks that can really derail the global economy. There are so many fragilities in the international system a lot of balance sheets haven’t been adjusted since the financial crisis , governments have overextended themselves and don’t have the capacity to respond, and interest rates are already to low.

Despite a plunge in the Australian dollar to as little as US 73.06c from US 76.48c as the vote unfolded. Financial markets are pricing in 100 percent chance of a Reserve Bank of Australia rate cut by September 2016.

With speculation rising that Federal Reserve chairman  Janet Yellen will be forced to scrap any prospect of a US rate hike this year, the Reserve Bank could soon be forced to manage down a resurgent Australian dollar experts say. More broadly the Reserve Bank believes the Brexit vote should be eminently manageable for Australia, even if the uncertainty triggered in financial markets is unhelpful for a global economy that had been showing signs of renewed momentum. When large falls occur on stock markets they develop a momentum of their own, undermining household sentiment that has been historically been very sensitive to falls in superannuation nest eggs.

Even though Britain’s vote may lead to more trade with Australia in export markets in sectors such as pharmaceuticals and biotechnology  many are worried at losing a natural English speaking doorway to Europe. Trade boffin Alan Oxley said the vote is likely to trigger a pause in the Australian Governments consideration of a trade deal with the United Kingdom as it waits to see how Britain reconfigured its relationship with Europe.

However while the direct trade impact on Australia is likely to be irrelevant, the decision comes at a time when there are still major unresolved financial and economic problems since the last Global Financial Crisis in 2008. At present it is a matter of wait and see what develops next. In closing, when heading to any of the European snow field regions my advice is to do your research on airfares, transport, hotels, currency exchange rates and lift prices prior to departure. There maybe some great last minute promotions available at any of the  resort locations.

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