U.S. Economy Up 1% In Q1: Will Brexit Derail Growth?

The historic decision that marked the exit of Great Britain from the European Union shook the financial world and rattled the stock markets globally. Market pundits believe that the ensuing market turmoil will take time to alleviate and could put a brake on the recovery of the U.S. economy, which expanded at a rate of 1.1% in the first quarter of 2016, up from 0.8% anticipated earlier. On the contrary, consumer spending advanced 1.5%, at a rate lower than the previous estimate of 1.9%, reflecting the slowest pace in two years.

Industry experts pointed out that the economy appeared in good shape in the second quarter, until the "Brexit" referendum raised concerns over future growth prospects. Both retail sales and home sales increased in the months of April and May. Retail sales inched up 0.5% in May following a robust increase of 1.3% in April, clearly suggesting an improvement in consumer spending. However, the shroud of uncertainty cast due to the Brexit may affect consumers' spending behavior and also exert pressure on business investment.

Needless to say, consumer confidence will also be hampered to an extent. A survey conducted just before U.K.’s vote to exit the European Union that roiled financial markets, revealed that consumer confidence index rose to an eight-month high in June to 98 from May’s revised reading of 92.4. However, the picture might change with July’s reading after taking into account the impact of Brexit.

The debacle in the financial arena triggered by the Brexit vote also put pressure on oil price and triggered volatility in the currency markets, with the pound losing its sheen drastically. The euro too is likely to weaken against the dollar. Moreover, risk-averse investors will no longer bet on the U.K. and European markets, and look for safer counters like U.S. assets to invest their money.

Thus, a strengthening dollar will hamper exports, as U.S. products become more expensive for foreign customers. The U.S. economy is also likely to face hurdles on both the diplomatic and strategic front as a result of Brexit. Moreover, companies with exposure to the U.K. market are likely to face the music with investors keeping a close watch on the bottom line. These include Apache Corp. (NYSE:APA) , eBay Inc. (NASDAQ:EBAY) , Molson Coors Brewing Company (NYSE:TAP) , JPMorgan Chase & Co. (NYSE:JPM) and The Goldman Sachs Group, Inc. (NYSE:GS) .

Well, the Federal Reserve has been surely keeping a close watch on the ongoing economic activities and is likely to keep the decision for a rate hike on hold given the recent turbulence. Last December, the Federal Reserve raised interest rates for the first time in almost a decade to a range of 0.25%−0.5%, and the market was bracing for another quarter-point increase sometime in July this year, which now appears a distant matter.

To conclude, we are currently keeping our fingers crossed in the hope that the U.S. economy will navigate brazenly through this rough tide, as it did in the recent past when China devalued its currency.