UK's Economic Outlook Slashed in Brexit Aftermath

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What are Leading Economic Institutions Saying?

The risks of an unprecedented exit from the EU are being widely discussed and there is consensus among analysts that the separation process is associated with high economic uncertainty. Among the most pessimistic analysts are KBC and Credit Suisse, forecasting a contraction of 1.5% and 0.5% respectively for 2017. Frontier Strategy Group also said it had lowered its GDP growth forecast for 2017 to a contraction of 0.5% from the 2.2% expansion expected the previous month. Mark McNamee, Senior Analyst at Frontier Strategy Group comments:

“We have revised our outlook for the pound, inflation, GDP, as well as all GDP components. Our revisions assume continued political volatility, particularly driven by a coming Scottish referendum, as well as interest rate cuts by the Bank of England and major drop in investment amid such continued uncertainty in the market.”

Mikael Olai Milhøj, Senior Analyst at Danske Bank, who expects the UK economy to grow 1.0% this year and to contract 0.4% in 2017, analyzes the consequences of the Brexit on the labor market:

“We expect the UK to fall into recession in the second half of the year which would likely cause unemployment to rise with a lag. UK is likely to be hit by falling investments due to higher uncertainty about the future economic environment for British firms. It is also likely that private consumption growth will slow. The longer-term consequences depend on the future UK/EU relationship and are more difficult to estimate. In the very short term, we expect GBP volatility to remain high. We expect EUR/GBP to stabilise in 0.85-0.90 range. Medium and long-term outlook is very uncertain. Flows, growth and relative monetary policy point towards a weaker GBP.”

Some economic institutions are still in the process of revising UK’s GDP forecasts, but the downtrend trend is clear. Simon Kirby, Head of Forecasting at NIESR, suggests an impact on GDP in the range of -2.2% to -6.3% in the long-run:

“Heightened uncertainty and risk aversion will likely persist in the UK and Europe in the interim, and probably beyond. It is currently unclear whether the government will aim to join the EEA or move to a WTO status. These have rather different implications for the long-run negative effect on the UK economy.”

It may be years before the full economic impact of the Brexit can be analyzed, but market volatility is very likely to remain high going forward and a prolonged political vacuum will only add to the uncertainty, all of which will weigh on the currency and the investment outlook.

Where to from here?

Where does the UK go from here? Better yet, where does everyone go from here? There are a lot of questions and not many answers as yet, however, as the world trudges along post-Brexit, the picture will hopefully become a lot clearer. All that can be done is wait and see whether the economic consequences of the Brexit turn out to be muted or if they do indeed spell disaster for the UK and the rest of the world economy. However, for the UK, our forecasts suggest the latter.

Related Links:
United Kingdom Economic Outlook
Global Economic Outlook
Uncertainy looms over UK's Economic Outlook Post-Brexit