Brexit decision is likely to reduce growth in the short term

Press Release of July 11, 2016

According to the German Institute for Economic Research (DIW Berlin), the uncertainty introduced by the results of the Brexit referendum could noticeably negatively impact on the German economy, resulting in a growth number for next year significantly lower than expected. In particular, the uncertainty about the UK’s economic prospects increased after the referendum, as mirrored in a flight to as safe perceived British government bonds, as well as major fluctuations in the equity markets. As a consequence, British companies are not only likely to hold back with investments, but also to delay or cut-back their plans regarding the creation of jobs—especially since they will presumably start having to take poorer financing conditions into account. This should dampen economic growth in the UK, thus limiting export opportunities for German companies as well.

“Against this background, it’s in the interests of both sides to reduce the economic uncertainty as much as possible—especially when it comes to the future relationship between the UK and the EU,” explains Ferdinand Fichtner, Head of the Department of Forecasting and Economic Policy at DIW Berlin.

After the US and France, the UK is the third-largest market for German exports. Germany’s most affected sectors would include the automotive industry—which sends a substantial share of its exports to the UK—as well as wood, paper, leather goods, and chemical and pharmaceutical products. All in all, products from the automotive, chemical and pharmaceuticals, and mechanical engineering industries make up roughly 63 percent of Germany’s UK-bound exports.
According to DIW Berlin’s calculations, the direct effect of the Brexit decision could dampen German exports’ growth in the coming year by one percentage point, or just under 15 billion euros. This is in turn based on the assumption that British import growth—as suggested by simulations conducted by the London-based NIESR Institute—will amount to one-eighth less than previously predicted. This change alone would reduce the growth of Germany's GDP by 0.5 percentage points in 2017. It should be noted that this only refers to the direct effects that are reflected in German exports to the UK; indirect effects such as financial market turmoil, declining FDI, and price effects cannot be evaluated at the moment and are therefore not factored into the calculations.