The global economy faces months — if not years — of slower growth as Britain's stunning decision to abandon the European Union threw financial markets into a tailspin and darkened the outlook for corporate and consumer spending.
Although the damage is likely to be concentrated on the other side of the Atlantic Ocean, experts said repercussions would ripple across the world and into the U.S.
The domino effect was on full display Friday as the Dow Jones Industrial Average plummeted 610.32 points, or 3.4 percent, to wipe out all of its gains from earlier in the year. The drop was even more dramatic in Europe and Asia, where major stock indexes sank 7 percent or more.
The vote escalated the risk that the global economy would not just stall but actually slip into recession. Recurring crises over government debt in Europe, the bumpy slowdown in China and the collapse in commodity prices have already battered prospects for global growth. International policymakers have long warned that the sluggish recovery from the Great Recession has left the world economy more vulnerable to another downturn.
Britain's exit from the EU — popularly known as Brexit — could prove to be the final straw, experts said.
"We think the time has come to consider that a financial market crash today may push a world economy teetering on the verge of a contraction over the edge," said Carl Weinberg, chief economist at High Frequency Economics.
The freefall in financial markets was a testament to the massive uncertainty surrounding the logistics of a separation. Economists said it would make businesses and households nervous about spending and could complicate trade between British companies and their partners in Europe and elsewhere. Prolonged volatility could stress European banks, and fluctuations in markets could test struggling countries such as Italy and Greece.
Britain will spend at least two years negotiating the terms of its departure from the 28-member alliance that has dictated the economic and political order in Europe for more than four decades. Britain must elect new leadership, strike new trade deals and craft a dizzying array of new regulations about issues such as immigration and investment.
Brexit supporters argued that leaving would boost the country's economy in the long run, allowing businesses and entrepreneurs to innovate and grow free from the red tape imposed by EU bureaucrats in Brussels. But many analysts say that optimistic scenario is unlikely, at least for the foreseeable future.
According to an analysis by Morgan Stanley, Brexit will shave between 0.3 to 0.6 percent from U.S. economic growth next year, draining some of the recovery's momentum. The forecast for the world economy is more pessimistic. The worst-case scenario is that the rate of expansion falls below 3 percent in 2017, "re-entering the danger zone for a global recession," the report said.
That would create a dilemma for the world's central bankers, often viewed as the stewards of their economies. Officials have been flooding the financial system with easy money for years in hopes of jump-starting growth. Japan, the European Central Bank and some European countries have instituted negative interest rates, while the Fed has ballooned its balance sheet by trillions of dollars.
Now, faced with yet another blow, it is unclear how much more central banks can do.
Some analysts have begun speculating that the Fed will need to cut its influential interest rate, just six months after raising it for the first time since the recession amid hopes that the U.S. recovery had solidified. At the very least, economists said, the Fed is likely to remain on hold when it meets again next month.
"Instability in Europe is going to have worldwide repercussions, especially at a time when growth around the world is so low," Cornell University economist Eswar Prasad said.
Investors were clearly shocked by the results from Britain's referendum on Thursday as vote tallies began trickling in overnight. Public opinion polls had been giving a slight edge to the campaign to remain in the EU, but early Friday morning it became apparent that the polls had been wrong — and traders started scrambling for the exits.
The sell-off began in Asia, where Japan's Nikkei index briefly halted trading in futures and ended the day down 8 percent. The British pound nosedived to levels not seen since 1985, at one point falling about 10 percent to $ 1.32. London's FTSE 100 dropped nearly 9 percent before clawing back. Bank stocks were hit particularly hard, with Barclays down a whopping 35 percent at its nadir.
Friday's volatility recalled similar bouts of turbulence over the past two years that were largely driven by fears that China's economy was stumbling. Investors fled into safe-haven assets and sent the U.S. dollar skyrocketing. The strong currency made U.S. exports more expensive, dragging down domestic growth.
That dynamic was repeated Friday as the dollar jumped more than 2 percent against a basket of other currencies and traders sought out the relative safety of gold and U.S. government bonds. Gold prices hit a two-year high, while the demand for 10-year Treasury notes pushed yields down to 1.58 percent, a level not seen since 2012.
Oil prices sank. Benchmark U.S. crude declined $ 2.47, or 4.9 percent, to close at $ 47.64 a barrel in New York. Brent crude, the international benchmark, fell $ 2.50, or 4.9 percent, to $ 48.41 a barrel in London.
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