BUSINESSES and financial markets hate uncertainty. The vote for Brexit gives rise to a surfeit of it. Ahead of the referendum, most economists agreed that leaving the EU would be costly for Britain’s economy in the longer term. Now that the result is in, analysis has shifted to gauging how the economy will react in the immediate future. Forecasts for economic growth are being revised down—markedly for Britain, materially for Europe, and modestly for the world.

A lot depends on the kind of trade deal Britain can negotiate with the EU and how quickly its outline will emerge. The longer this takes, the worse will be the economic impact. No single narrative can hope to do justice to the many permutations that are possible. But three broad scenarios cover most of the terrain.

Begin with the most benign of possible outcomes. The 27 other members of the EU, led by Germany and France, quickly agree on a common negotiating position that seeks to keep Britain as closely attached to Europe as possible without it being a member. In Britain either the leadership contest now taking place in the ruling Conservative party or a subsequent general election produces a prime minister with a strong mandate who can command a parliamentary majority. Both sides converge on a trade deal for Britain similar to the one enjoyed by Norway, with unfettered access to the single market and with some of the burdens of full EU membership (see article). The fine details might take years to iron out fully, but agreement on a deal’s outline would give enough certainty to businesses in Britain to resume some investment.

In this event, the British economy would suffer a rotten few months, but a bounce-back might be evident by the end of 2016. Sterling would rally in anticipation. The spillovers to Europe and the global economy would be small and transitory. The path would be similar if Britain could quickly find a way to reverse its decision to leave.

In the second case, which is also the most likely, discussions are considerably longer drawn-out. Both sides come to a settled idea of the deal they each want by the autumn, but they remain divided on issues such as the free movement of labour, payments to the EU budget and compliance with its regulations.

The middle way

In this unsettled state of affairs, businesses in Britain (and, to a lesser degree, other countries with which it has close ties) defer whatever spending they can. The biggest casualties will be capital projects with big upfront costs whose profitability depends either on friction-free trading with Europe, or on access to other export markets which Britain enjoys only because of trade deals negotiated by the EU. The pound remains weak, indeed falls further.

That in turn pushes up the costs of imported goods to the detriment of real incomes. Hours worked and wage growth fall, even if jobs do not immediately go (though hiring freezes are likely): just as companies value the option of holding off on big investments, they tend to hang on to workers for as long as they can during downturns because they are costly to rehire if the economy picks up. Consumer spending power is reduced. In principle Britain’s exporters ought to get a lift from a cheaper pound, but recent evidence suggests they might not. Sterling’s weakness in the years after the global financial crisis put a brake on consumer spending (because of higher inflation) but appeared to do little to boost exports.

Brexit: taking stock In this middling scenario, the combined effects of business uncertainty and a weaker pound would be likely to cut the economy’s growth rate (compared with a situation in which Britain had voted to remain in the EU) by 1-2 percentage points in the next 12-18 months, with the worst impact coming in the second half of this year. A recession in Britain would hurt exporters in the rest of Europe, where some freezing of capital spending is also likely. A decent rule of thumb is that the reduction in GDP growth in Europe will be between a third and a half as big as the loss to Britain’s rate of growth. As long as the reaction in financial markets is broadly commensurate with the hit to the economy in Europe, and panic is contained, further spillover into the world economy will be fairly limited, say forecasters. In the “medium-stress” scenario set out by economists at Morgan Stanley, a bank, the impact of Brexit takes a cumulative 1.5 percentage-points off Britain’s growth rate in 2016 and 2017, half as much off growth in the euro area and 0.5 percentage points off global growth. The Bank of England’s governor, Mark Carney, and his counterparts will do what they can to underpin confidence and demand in the real economy and to keep banks afloat with cheap funding. The Federal Reserve is unlikely to raise interest rates before December at the earliest. Yet a worse outcome is all too easy to imagine. Informal trade talks might stall. The politics in Europe could easily sour. Agitation for referendums in other parts of the EU might grow, despite the convulsions in Britain’s polity. Were the Brexit vote, or the negotiations with Britain, to stir broader anti-EU or anti-euro sentiment, worried business leaders across Europe would be more likely to cut back on investment. Europe’s fragile banks might be spooked by tumbling stock prices into choking credit to firms and householders. As business conditions worsened, anxious consumers would defer planned spending on holidays and big-ticket durable goods until their job prospects were clearer. If stockmarkets or house prices fall hard in a panic, that would detract further from spending in countries, notably Britain, where changes in household wealth have a material impact on consumption. Along with Australia and Canada, housing in Britain is already richly valued against rents and incomes compared with the long-run average, thanks in part to brisk demand from foreign buyers (see chart 1). A weaker pound makes British assets tempting to foreign bargain-hunters. But Brexit might just as easily prompt a rethink about the enduring worth of buying property there, especially if London loses ground as a financial centre (see article). Even before the Brexit vote, there were signs that the housing market was beginning to lose momentum.

For now many forecasters are treating the Brexit vote as a regional economic event, rather than a global one. Britain accounts for a bit less than 4% of world GDP; it is not big enough to make the global economic weather as America or China can. Even so, there are worries that the Brexit vote might disturb some existing faultlines in the world economy in a way that amplifies its impact. Three concerns in particular are Italy, China and world trade.

Careful with those banks

Start with Italy. It is the weakest big link in the euro-area economy (Greece and Portugal are troubled tiddlers by comparison). Banks are fragile across the currency zone, but Italy’s are particularly brittle, weighed down with bad loans built up over a long period of economic stagnation. Brussels has prevented a state-backed “bad bank” from purchasing some of those iffy loans because it would contravene newish EU rules on state aid to banks. This closes off an indirect way of building up their capital. Instead banks must either seek new capital from private investors, which is insufficiently forthcoming, or “bail in” their bondholders in a way that imposes losses. Since bank bonds in Italy are widely held by small depositors, a broad bail-in would be politically impossible.

Matteo Renzi, Italy’s reform-minded prime minister, says he will resign if the result of a referendum on constitutional reform goes against him in October. He is already losing popularity. It is a volatile situation. If Mr Renzi goes Italy will be set adrift again, and fears that it might leave the euro—as both the Five Star Movement and the Northern League wish to do—would return. Brexit might make the economics more combustible, says Laurence Boone, chief economist of AXA, an insurance firm. A weaker economy puts greater pressure on Italy’s tottering banks, shares in which plunged in the days after the British referendum (see chart 2). The European Central Bank can smother symptoms of anxiety by buying government bonds, but cannot do much more to cure the underlying problems. If the stresses intensify, the least-bad option might be for Italy to defy the EU and recapitalise its banks. That would reignite fears of EU disintegration.

The line from Brexit to China’s economy is less direct and relies on broader financial contagion. The EU imports more from China than anywhere else; weaker growth will be unwelcome when China is wrestling with mountainous debts and oversupply in heavy industry. The degree to which decreased European demand would exacerbate those problems may not be that bad in itself, but there is an additional risk: that European weakness sees the dollar strengthen further as investors flock to the safety of American assets, and that this renews fears about a devaluation of the yuan. So far, the authorities have allowed the yuan to partly track the falls in the euro and sterling, as part of a strategy to follow a basket of currencies, and not just the dollar. This week the yuan reached its lowest value against the dollar since 2010, without prompting panic. It has helped that the currencies of other exporters, notably Japan, have risen against the euro as hot money flows out of Europe and into Asia. A third area of global concern is trade. If Britain, long a champion of free trade, can vote to revoke a regional trade deal, how much faith can businesses put in other trade agreements? That alone might have a chilling effect on investment worldwide.

The WTO recently warned that trade-protection measures in the G20 are rising at their fastest rate since 2009, when they were first tracked, in part in response to a glut of global steel capacity, much of it in China (see chart 3). Though the Brexit vote was shaped by concerns about the free movement of labour, rather than of goods and services, the appetite for new trade deals was already weak. The prime minister of France, Manuel Valls, said this week that a long-discussed Transatlantic Trade and Investment Partnership (TTIP) between the EU and America would, in its current form, be “a breeding ground for populism”. There is scarcely more enthusiasm on the other side of the Atlantic, where the presidential candidates are either cool or hostile to the Trans-Pacific Partnership (TPP), a trade deal with Pacific-rim nations that has yet to be ratified. The Republican leader in the Senate, Mitch McConnell, says that “by any objective analysis this is, shall I say, a down period for trade agreements around the world.”

A silver lining?

A few optimists reckon that if Brexit is sufficiently painful for Britain’s economy, it might in time bolster the case for free trade. The fate of other countries that have had to quickly realign their export markets is not encouraging. When Britain joined the EU in 1973 its erstwhile trading partners in the Commonwealth suffered: by 2000 New Zealand had slipped from 8th to 22nd in country rankings of income per person, for instance. Other voices in Washington say there is a potential lifeboat for Britain. The TPP is an “open platform” agreement, meaning that other countries are allowed to apply to join it, once completed. An independent Britain might ask to join and—subject to a vote in Congress and agreement from the pact’s other members—enjoy trading access to America, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, Singapore, Vietnam and—yes—New Zealand.