Only a week ago, global markets were reeling from their worst day on record, with $ 2 trillion wiped from the books in the hours after Britain voted to sever ties with the European Union.
But at least in the financial world, the so-called Brexit turned out to be a fleeting panic, not the start of a prolonged swoon. Markets rebounded this week across Europe, Asia and in the United States. The Dow Jones industrial average and Standard & Poor's 500-stock index finished the week with four straight days of gains. And in London, despite unsettling political upheaval, the FTSE 100 saw its strongest week in more than four years.
The quick return to calm reflected a recognition among investors and traders that any impact of Britain's rupture would develop gradually, and perhaps be largely contained within Europe. For now, the global economy looks much as it did before the vote: growing slowly, with borrowing costs at historic lows.
Although economists say Brexit could prove more catastrophic if it triggers other departures from Europe's 28-nation union, the departure by itself is merely one more on a long list of global worries — among which are terrorism, wage stagnation and a slowdown in China.
"Nobody even thought, going into that vote, that Brexit was a possibility," said Tom Porcelli, chief U.S. economist at RBC Capital Markets. "The market was too complacent. So you had this wild reaction to the downside. And now you're starting to take it back. Here we are now — there's relative calm in the streets of the United Kingdom, services are not breaking down. The worst fears have not materialized. But make no mistake, it's a long road."
In a stunning victory for the “Leave” campaign, Britain has voted to exit the European Union. Here’s what happens next. (Jason Aldag,Adam Taylor/The Washington Post)
On Friday, the Dow climbed 17 points, nudging up by 0.1 percent. The S&P 500 edged up by 0.2 percent. Both indexes — after rising about 3.5 percent for the week — stand virtually where they were before the June 23 vote.
In an appearance Friday morning on Bloomberg TV, James Bullard, the president of the Federal Reserve Bank of St. Louis, said that the "verdict so far is that Brexit will not have a big impact on the U.S., possibly zero. There is the issue about whether there would be further contagion to Europe, but I don't see that so far either."
Although equities have recovered, that tells only part of the story, say economists, who note that there are fresh signs of pessimism about the world's path. Brexit has pushed fund managers more heavily into the bond market — meaning they are eager to put their money into the most conservative investments. That demand has further pushed down yields on bonds across the world, and Friday, the yield on the 10-year U.S. Treasury note briefly hit a record low.
Yields also have fallen amid signs that central bankers are again willing to loosen monetary policy to stimulate their economies. Bank of England Gov. Mark Carney said in a speech Thursday that the bank could cut already record-low interest rates this summer, because the "economic outlook has deteriorated."
"The near-term challenges facing the U.K. economy can't be wished away," Carney said. "But they can be addressed."
Bond yields have also fallen over the past week in Japan, France, Germany and the Netherlands. In Switzerland, following the Brexit vote, the yield on a 30-year bond plunged into negative territory for the second time in less than two weeks. Swiss assets are seen as safe bets during times of turbulence, and investors are now willing to pay a de facto surcharge to lend the government money over 30 years.
The activity in the bond market suggests "a weaker global economic outlook," Scott Anderson, chief economist at Bank of the West, said in an email. "The market seems to be pricing in a high probability of global recession at the moment."
After the United Kingdom voted to leave the E.U. in an historic referendum, voters were surprised that some of the rhetoric used to sway the vote to “Leave” was being walked back. (Jason Aldag, Max Bearak/The Washington Post)
Most forecasters say the British economy will contract over the next year as companies hold off on investments and banks consider relocating from London to other European financial hubs. But the impact on other economies in Europe will be determined by the terms of Britain's exit, which will be negotiated over several years. The two leading candidates to become Britain's next prime minister, Theresa May and Michael Gove, have both said they do not intend to trigger those negotiations this year.
There is also uncertainty about whether other European countries will follow Britain in pulling away from the E.U. amid concerns about immigration and the rise of nationalist politicians. Despite years of stagnation, the E.U. has largely been a steady economic force over decades; its nations, as a group, represent the largest economy in the world.
For the United States, Brexit reduced the odds that the Federal Reserve will raise interest rates this year — something it had initially pledged to do several times across 2016. One obstacle for the economy could be the appreciation of the dollar, which hurts U.S. exporters. Since last week, the dollar has strengthened more than 2 percent against the euro.
On Friday, S&P Global Ratings cut its projections for U.S. economic growth, saying that gross domestic product would expand by 2 percent this year, compared with 2.3 percent in March. S&P also raised the odds of recession to 20 to 25 percent, compared with 15 to 20 percent in March.
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