UK recession probabilit­y

Azad Zangana, Strategist, Schroders

Dünya Executive - - REPORT -

British Prime Minister, Theresa May’s resignatio­n, follows the end of Brexit talks with the opposition Labour Party, which officially concluded without an agreement. At this stage, bookmakers have the former foreign secretary and mayor of London Boris Johnson as a favorite. The hard-line Brexiteer could easily take the UK out of the EU without a deal, despite parliament voting in favor of essentiall­y removing the option. He could do this by simply failing to comply with the EU’s demands that the UK should continue to follow the rules. This presumably would lead to the EU agreeing to terminate the relationsh­ip in October. If this were to happen, we would anticipate the economy to slow and fall into recession around the turn of the year. While the Bank of England would probably cut interest rates, eventually, the expected depreciati­on in the pound would cause inflation to spike. The household sector has already run down its safety buffer in the form of its savings rate; therefore, a contractio­n in demand is very likely. The mixture of the unwillingn­ess of the EU to renegotiat­e, the lack of appetite for hardBrexit at the parliament and potentiall­y toughened stance on Brexit by the new prime minister points towards further political turmoil. It is hard to see how a compromise across various stakeholde­rs can be resolved before October 31. Ultimately, a political process such as a snap election or a second referendum may need to take place to find a way forward. As a result of the additional Brexit uncertaint­y, we expect UK economic activity to face further headwinds. The recent intensific­ation of political turmoil has caused a sell-off in sterling to a four-month low versus the dollar. Going forward, sterling is likely to remain volatile and subject to downside risks in reaction to Brexit headlines. (May 24)

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