Brexit’s Potential Impact on the San Antonio Economy

With the United Kingdom voting to leave the European Union, it is worth considering the impact it might have on the San Antonio economy. This basically translates to how it might affect the U.S. and Texas economies because I don’t think it will have any direct effects on the San Antonio economy since there is not a very strong connection between the San Antonio and United Kingdom economies. However, there is a reasonable chance that the uncertainty and chaos caused by Brexit throws the United Kingdom and European Union economies into recession. The best I think we can hope for it that it has no effect. I can’t envision a scenario where Brexit increases economic growth in the U.K or the E.U.

While the United Kingdom’s economy is not big enough to throw the U.S.into recession, according to The Economist, “…Britain is big enough for a recession there to have a meaningful effect on Europe’s economy. As a rule of thumb, whatever the reduction in Britain’s GDP growth, Europe’s economy will suffer a drop of about half as much.”

If a recession in Britain does drag Europe into a recession, the ripples across the pond could drag the U.S. economy into a period of slower growth possibly leading to a recession because the European Union taken together is the largest economy in the world. GDP in the European Union was $18.51 trillion in 2014 compared to GDP in the United States of $17.42 trillion in 2014.

In 2015, U.S. exports to the European Union amounted to $272 billion which equated to 13.36% of all exports (See Trade data). This makes the European Union the second largest export market for the U.S. behind Canada at $281 billion. Mexico is the third largest export market receiving $236 billion in exports from U.S. companies. Exports to the United Kingdom were $56 billion in 2015 (2.76% of all exports). While Texas has the largest volume of exports among all states (See Exports by state 2015), the United Kingdom accounted for 1.8% of total exports from Texas in 2015. This relatively low volume of trade does not mean Texas and the San Antonio economies will be immune from the effects of Brexit. If growth in the U.S. economy slows, it is likely that growth in the Texas and San Antonio economies will follow suit.

SN logo no name

 

Update on San Antonio and Texas Metro-regional Economies

This past Tuesday, June 23, I gave a speech to a gathering of bankSNB directors and clients on the San Antonio regional economy. IĀ provided an update on how the San Antonio economy is doing through April and compared it to the U.S., Texas, and other major metropolitan economies in the state. In short, San Antonio’s economy continues to grow at a healthy clip, and I expect the growth to continue through the rest of the year. One graphic that really jumped out to me was the rapid rate of increase in single-family housing prices, especially in Dallas and Fort Worth. This is certainly something worth watching going forward. If you are interested in looking at the presentation, it can beĀ found here.

Forecast for Texas and San Antonio Economies in 2015

I released my 2015 economic forecast for the San Antonio economy yesterday. I am projecting employment growth in the range 2.25-3.0% and a reduction in the unemployment rate to 3.4-3.8%. The employment growth forecast is down a bit from the growth San Antonio experienced in 2014 at 3.26%, but it is still a healthy growth rate for San Antonio and will continue to push unemployment down from its December rate at 3.9%. Keith Phillips, senior economist at the Federal Reserve Bank of Dallas, projects employment growth for Texas to be in the range of 1.0-2.0% in 2015. Employment across the state grew at a rate of 3.23% in 2014, so while it is projected that the state will continue to see growth, it is a fairly sizable reduction.

The reductions in projected growth rates for 2015 are mainly due to the impacts on the Texas and San Antonio economies, but the divergence in the size of the decreases in the growth rates between Texas and San Antonio is due to the differing impacts on the respective economies. The energy industry is a big (and increasing) part of the Texas economy, so while there will likely be a boost in consumer spending due to lower fuel prices, areas like Houston, Dallas, Ft. Worth, Midland/Odessa, Corpus Christi, and Longview are still likely to be hit pretty hard, since the energy industry is a large part of their regional economies.

However, while the San Antonio economy will be negatively affected by the downward pressure from slowing growth across the state, it has some unique characteristics that will minimize the impact. One key characteristic is that the mining industry is only about 3% of the San Antonio economy. Additionally, much of that industry in San Antonio is focused on refining, so it will actually benefit from the low oil prices. There has also been some concern that the slowing activity in the Eagle Ford shale area will have a big impact on San Antonio. There will certainly be a negative impact, but the vast majority of the activity in the Eagle Ford area is south of San Antonio. Thus, while the San Antonio economy certainly benefited from the Eagle Ford shale play, the impact on growth was not substantial, and as such, I don’t think the negative impact will be very large, either. Another unique characteristic is that the reduction in employment that will continue as Eagle Ford drilling activity decreases will likely be absorbed by the construction industry in San Antonio. It is not unique to San Antonio that the housing market is very strong, as the housing market is tight across the state. As the Eagle Ford hiring activity increased a few years ago, we saw workers leave the construction industry in San Antonio to work in the Eagle Ford area for much higher wages, but that flow of labor will most likely reverse itself this year. With the tight housing market, construction activity is likely to increase this year, so as employment in Eagle Ford continues to decline, many of these workers but the close proximity of San Antonio to Eagle Ford means that many of these workers will possibly be able to find employment in the construction industry. Lastly, much of the tourism business in San Antonio comes from visitors who drive to the area, so the lower gas prices making it cheaper to drive and providing additional disposable income could cause a boost in tourism in San Antonio.

Other risks to the forecast include slowing growth around the world and the strong dollar. The impact of the strong dollar is already starting to show its effects on the San Antonio economy, but I do not think this will be a large negative impact. It does contribute some to the slowing growth as indicated in the forecast.

If the forecasts come to fruition, growth in Texas will likely fall below that of the U.S., but San Antonio will at least see growth at its historical average rate. However you look at it, 2015 will still be a year of growth.