Britain's last month vote to leave the European Union (EU) could have spillover effects for years, according to a recent report released by the Office of Financial Research in the U.S. Department of Treasury.
"Although the immediate market volatility has subsided, the policy uncertainty and the ultimate financial and political spillovers may last for months or years, leaving markets vulnerable to further confidence shocks," the Office of Financial Research said earlier this week in a report on the markets monitor of the second quarter.
The report said the British government is expected to respect the result of the country's referendum vote on June 23 and formally move to exit the EU, but "uncertainty remains about if, how, and when Brexit will be implemented."
The referendum vote has already led to political turmoil in Britain and affected the political landscape in other EU member countries.
Former Conservative Party leader David Cameron announced his resignation as British prime minister on June 24, just hours after the Britons voted by a 52-48 majority to leave the EU.
After weeks of the Conservative leadership contest, former British Home Secretary Theresa May became the Conservative Party leader on Monday and took over as new prime minister on Wednesday.
May said on Friday that she would not trigger Article 50 of the Treaty of Lisbon, a procedure through which a country withdraw from the EU, until her government has "a UK approach and objectives for negotiations."
"Negotiations will not begin immediately. Once they do, the UK and EU have two years to negotiate an exit under the Lisbon Treaty, which sets the procedures," the report said, noting that Brexit negotiations may have "far-reaching legal and economic implications" for the large cross-border financial industry and foreign investment in Britain.
Many economists have lowered growth forecasts for Britain and broader EU after the referendum vote, and some predicted a recession in Britain by early 2017, as consumers and businesses might postpone spending and investment due to uncertainty, the report said.
The International Monetary Fund has warned that significant uncertainty surrounding Brexit was likely to dampen economic growth in Britain, Europe and the rest of the world, and the British economy could shrink 0.8 percent in 2017 if it leaves the EU.
Brexit's full effects on British and European economies and financial systems will depend on those policy decisions, unfolding over the coming months and years, the report said.
In a severe scenario, shocks from Britain and Europe could affect U.S. growth and financial stability through trade linkages, large direct financial exposures, or confidence and indirect effects, according to the report.
