Recession risk rises as British vote to leave E.U. breeds uncertainty

The risk of another global recession escalated Friday after Britain's stunning decision to leave the European Union plunged financial markets into free fall and tested the strength of the safeguards put in place since the last downturn seven years ago.

Wall Street was slammed from the moment trading opened, with the Dow Jones industrial average dropping more than 500 points within minutes. Though it pared those losses over the morning, it was back down 610.32 points, or nearly 3.4 percent, by the close of regular trading. The broader Standard & Poor's 500-stock index fell more than 3.5 percent and the tech-heavy Nasdaq suffered a decline of more than 4 percent.

The Dow closed at 17,400.75, while the Nasdaq finished at 4,707.98 and the S&P 500 at 2,037.41.

The gut-wrenching moves were the latest sign of panic that began when the results of Britain's Thursday referendum began to trickle in overnight. Japan's Nikkei index temporarily halted futures trading amid the sweeping global sell-off and closed down 8 percent. The turmoil then hit European stock markets, with France's major index also dropping 8 percent while Germany's fell nearly 7 percent. The London-based FTSE 100 initially plummeted nearly 9 percent but ended the day with a 3 percent decline.

International policymakers have long warned that the sluggish recovery from the Great Recession has left the world economy more vulnerable to another downturn. Recurring crisis over government debt in Europe, the bumpy slowdown in China and the collapse in oil prices have already battered prospects for global growth. Britain's exit from the E.U. — popularly known as "Brexit" — could prove to be the final straw, experts said.

"We think the time has come to consider that a financial market crash today may push a world economy teetering on the verge of a contraction over the edge," said Carl Weinberg, chief economist at High Frequency Economics.

Investors around the world appeared to be caught off-guard by the outcome of Britain's referendum. As late as Thursday afternoon, public opinion polls gave a slight edge to the campaign to "remain." But as the vote tallies rolled in overnight, it became clear the polls had been wrong — and traders started scrambling for the exits.

"Financial markets react to unexpected but also high-magnitude events," Clem Miller, a portfolio manager at U.S.-based Wilmington Trust, said from London. "This is a high-magnitude event for financial markets."

Mark Carney, governor of the Bank of England, moved quickly to assure investors. "We've taken all the necessary steps to prepare for today's events," he told reporters. Carney added that British banks have been stress-tested "against scenarios more severe than the country currently faces."

A similar message was issued by the European Central Bank chief, Mario Draghi, who said the institution was "ready for all contingencies" to help calm market anxiety, including pumping additional funds into the region's banking system.

Xinhua, China's Communist Party-controlled news agency, speculated that the Brexit vote would put downward pressure on global markets, potentially causing China's markets to drop at least 5 percent. After the "leave" vote, Chinese analysts warned of short- and medium-term instability but played down risks to China's economy.

"The economy of U.K. will not collapse. Neither will the euro. It will likely be a one-time blow. If other countries start to follow suit of U.K., though, the euro will have to deal with blows constantly," said Lu Zhengwei, a senior economist at Industrial Bank Co. Ltd.

Some analysts even began speculating that the Federal Reserve would have to cut interest rates, just six months after raising them for the first time since the recession amid hopes that the U.S. recovery had solidified. At the very least, economists said, the Fed is likely to remain on hold when it meets again next month.

Even before the Brexit vote, questions were being raised about the health of the U.S. job market and the viability of the recovery. Now, analysts at Morgan Stanley estimated the vote will reduce U.S. growth by 0.6 percent over the course of 2017 in its worst-case scenario.

"Instability in Europe is going to have worldwide repercussions, especially at a time when growth around the world is so low," Cornell University economist Eswar Prasad said.