The UK electorate voted by a 52%-48% margin to leave the European Union, with remain leads in London, Scotland and Northern Ireland outweighed by leave victories in the rest of England and Wales. This has prompted the resignation of Prime Minister David Cameron, who will be replaced by a new Conservative leader by October, but there is no plan to hold a general election. The surprise result triggered a collapse in the pound and a violent risk-off move in global markets.
 
The UK and the rest of the Europe now enter a period of great political uncertainty but there is unlikely to be any change to the UK's economic and financial arrangements with the EU before late 2018. The exit procedure is governed by Article 50 of the Lisbon Treaty, which allows for a two-year period for a country to negotiate terms of departure. The new Prime Minister is expected to trigger Article 50 soon after assuming office.
 
The rise in political and economic uncertainty will act as a drag on growth, primarily by discouraging business investment and hiring. The Treasury predicted that that the economy would enter a recession in event of a Brexit. We do not share this view because 1) recent data indicate that the economy had solid momentum before the referendum, 2) the Bank of England is likely to cut interest rates on any signs of weakness and 3) the lower level of the pound should stimulate net trade (although higher import prices will dampen consumer spending).
 
The UK decision will encourage anti-EU politicians in other countries but we judge it unlikely that it will trigger copycat referenda, let alone the exit of another member state. It may, indeed, cause Eurozone countries to press on with deeper economic and political integration. The EU leadership is likely to pursue a tough line in negotiations with the UK to deter other countries from considering an exit, particularly in view of French and German elections due in 2017.
 
The UK accounts for 2.3% of global GDP measured at “purchasing power parity”, with the current EU as a whole at 16.7%. The direct global implications of any uncertainty-related slowdown in UK / European growth are minor. The bigger risk is that the Brexit shock leads to a sustained risk-off episode in markets that feeds back into weaker demand. This is not our central scenario because: 1) the US and Chinese economies appear to be regaining momentum, with monetary trends and leading indicators suggesting solid second-half prospects; 2) global liquidity remains plentiful, as evidenced by a large positive gap between real money and output growth; and 3) the Fed and other central banks are likely to ease policies in the event of significant market weakness.