In its weekly review today, the Ministry of Finance Chief Economist Department commented on the effects of the UK's exit from the European Union (EU), predicting that the volatile effect in the global capital markets on the capital markets in Israel would be similar to that of the 2012 euro bloc crisis (which was succeeded by an average 6.5% drop in the capital market indices in Israel).
The Ministry of Finance explained that the UK economy was the world's fifth largest and Europe's second largest, but accounted for less than 4% of global GDP (a sixth of US GDP). "A recession in the UK caused by damage to exports is not expected to lead to a real global crisis, but will contribute to volatility in the capital markets that will accompany the prolonged process of leaving the EU. The global effects will depend on whether an economic crisis develops in the UK, and to what extent the effects spread to other EU countries," the review stated.
Concerning the non-financial aspect, the Ministry of Finance explained that Israeli exports to the UK totaled less than $5 billion a year ($4 billion in exports of goods and $800 million in exports of services).
"If we assume that the pound sterling devaluation is permanent, and the elasticity of Israel exports to the UK with respect to the shekel-pound exchange rate is 0.2, the negative effect on Israeli exports will be small - less than 0.1%. If growth in the UK suffers (and to a lesser extent, also in the EU), it would be liable to result in some decline in demand for Israeli exports. At the same time, it is possible that the UK's leaving the EU could improve Israel's ability to compete for the European market (a key destination for Israeli exports of goods)," the review pointed out.
In summary, the Ministry of Finance admitted that there was great uncertainty about the economic consequences of the vote to leave the EU in the British referendum. From the Israeli perspective, however, the balance of threats and opportunities is not necessarily negative. The consequences are primarily political, and worldwide concern is focused on a possible domino effect in other EU countries. At the same time, unlikely extreme scenarios exist (such as a dissolution of the bloc or a global crisis) that would have a substantial economic effect on Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on June 26, 2016
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