Brexit to spark UK re­ces­sion, fore­cast­ers say

The Pak Banker - - MARKETS/SPORTS -

The UK econ­omy may be head­ing for its first re­ces­sion since 2009, with econ­o­mists slash­ing their fore­casts in the wake of the Brexit vote and now see­ing two quar­ters of con­trac­tion this year.

While the 0.1 per­cent de­cline in gross do­mes­tic prod­uct an­tic­i­pated in each of the third and fourth quar­ters is mod­est, it will mark the end of more than three years of un­bro­ken growth. The pro­jec­tions in the Bloomberg sur­vey com­pare with a 0.6 per­cent ex­pan­sion pre­dicted for those pe­ri­ods be­fore the June 23 ref­er­en­dum.

The changed out­look since the U.K. voted to leave the Euro­pean Union has the Bank of Eng­land -- which had been on a slow track to­ward in­ter­est-rate in­creases -- now con­tem­plat­ing ex­pand­ing stim­u­lus for the first time since 2012. While the im­pact is only show­ing up so far in mea­sures of con­sumer and busi­ness con­fi­dence, that could ul­ti­mately spill over into key driv­ers of growth in the com­ing months, stymieing the econ­omy.

Even with some pre­dicted BOE stim­u­lus, the prob­a­bil­ity of Bri­tain slid­ing into its first re­ces- sion since 2009 stands at 40 per­cent, up from 18 per­cent in June, ac­cord­ing to the sur­vey, which was con­ducted after the cen­tral bank's July 14 pol­icy an­nounce­ment. That's the high­est since Bloomberg started track­ing the like­li­hood in 2012.

"We ex­pect to see a re­ces­sion around the turn of the year, based on the idea that there will be quite a large un­cer­tainty shock which will lead to cor­po­rate re­trench­ment," said Nick Kou­nis, head of macroe­co­nomic re­search at ABN Amro Bank NV in Am­s­ter­dam. BOE pol­icy mak­ers "need to wait for a lit­tle bit of ev­i­dence but they can't wait un­til it has al­ready hap­pened be­cause mon­e­tary pol­icy works with a lag." Gov­er­nor Mark Car­ney has in­di­cated that some eas­ing may be re­quired, and the ma­jor­ity of econ­o­mists sur­veyed pre­dict the BOE will re­spond to the slow­down with one in­ter­est-rate cut of 25 ba­sis points be­fore the end of the year, tak­ing the al­ready record-low rate to 0.25 per­cent. The cen­tral bank will also boost its quan­ti­ta­tive-eas­ing pro­gram, cur­rently 375 bil­lion pounds ($494 bil­lion), by 10 bil­lion pounds in Au­gust, ac­cord­ing to the me­dian es­ti­mate. The BOE's next pol­icy an­nounce­ment is Aug. 4, when the Mon­e­tary Pol­icy Com­mit­tee will also pub­lish new growth and in­fla­tion fore­casts. Of­fi­cials have said ster­ling's sharp drop will put up­ward pres­sure on short-term price growth, though they have dif­fer­ing views on the medium term, which will play a part in their de­bate on whether to loosen pol­icy.

There may be some op­po­si­tion within the MPC to quick ac­tion. Pol­icy maker Kristin Forbes wrote in the Tele­graph news­pa­per that there's no need to hurry to add stim­u­lus, cit­ing a mod­er­a­tion of the mar­ket tur­moil since the vote, calm con­sumers and "quite solid" growth be­fore the ref­er­en­dum.

"Un­til more hard data is avail­able, I be­lieve this is a good time to 'keep calm and carry on'," she wrote.

Even with­out hard data, some com­pa­nies are ex­press­ing con­cern. How­den Join­ery Group, a Lon­don-based maker of kitchens, said Thurs­day that the ref­er­en­dum re­sult means there is "clearly a height­ened de­gree of un­cer­tainty as to how de­mand in the rest of the year will pan out." Air­line EasyJet Plc said that Brexit- re­lated cur­rency volatil­ity was im­pact­ing con­sumer con­fi­dence.

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