Daily Management Review

UK Economists Predict Post-Brexit UK Economy to Shrink – First Time in 4 Years


08/03/2016




UK Economists Predict Post-Brexit UK Economy to Shrink – First Time in 4 Years
Britain's oldest independent think-tank is of the opinion that the first quarterly contraction in almost four years would be marked this time as the U.K. economy is likely to shrink in the three months following the Brexit vote.

The National Institute of Economic and Social Research (NIESR) said that there are chances that the post Brexit UK economy runs the risk of further decline into recession in the long turn and the economy is seen falling by 0.2 percent in the third quarter in the short term due to the U.K.'s vote to leave the European Union in June.
 
"We are expecting a marked slowdown in the U.K. economy," Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, told journalists at a media briefing on Tuesday.
 
When the economy shrinks by two or more consecutive quarters — in the next 18 months, he put a 50 percent probability on a technical recession.
 
Earlier, economists at Goldman Sachs forecast a "mild" recession in the U.K. by early 2017 and this NIESR prediction follows on from Goldman Sachs’ prediction. Warnings of a possible recession have also been issued by the International Monetary Fund (IMF) even though that is not base-case scenario of the global body.
 
"I don't think any of us are talking about a recession on the scale of that (U.K. downturn in 2008-09 after the global financial crisis)," Kirby said.
 
The Bank of England is starting its two-day policy meeting on Wednesday and the central bank would be further pressurized by the downbeat forecast.
  
The bank is expected to make a reduction of its base rate by 25 basis points after this meeting and making a further 15 basis point-cut in November, NIESR notes. The current rate of the Bank of England is all-time low of 0.5 percent and with a further reduction it would reach 0.1 percent.
 
It added that the bank might also reintroduce quantitative easing.
 
According to the first official estimate out since the Brexit vote, the U.K. grew by a better-than-forecast 0.6 percent in the second quarter this year. Data from the three months ending June 30, with the referendum taking place on June 23, formed the basis of the figure from the Office for National Statistics.
 
"Uncertainty will persist over the next couple of quarters rather than decay … The decline in business investment is expected to continue into the second half of the year and into 2017," Kirby said.
 
As a whole, the U.K. economy would grow by 1.7 percent for 2016, the NIESR forecast in line with the IMF. Rather than the 1.3 percent expected by the IMF, the U.K. institute is more negative about 2017, seeing 1.0 percent growth.
 
It also cuts its growth forecast for the euro area to 1.3 percent from 1.7 percent.
 
Pressure on Europe's biggest banks — some of which remain fragile, particularly in Italy, would be put by greater "balkanisation" of the European Union and its financial industry, the institute also warned.
 
(Source:www.cnbc.com) 






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