The UK’s vote to leave the EU means it now has a 50/50 chance of entering a recession by the end of 2017, according to the National Institute of Economic and Social Research (NIESR).
Brexit means the UK economy will see growth of 1.7% in 2016, it says, but that figure will fall to just 1% by 2017.
While this is technically not a recession — which is defined as two consecutive quarters of economic contraction — the uncertainty over the UK’s future could push the country into one.
Despite saying that there’s a 50/50 chance of recession, the NIESR’s prediction is actually one of the more optimistic forecasts released in recent weeks. As Business Insider’s Jim Edwards argued over the weekend, virtually every major bank is now saying that there WILL be a recession in Britain in the coming years, with a rare degree of certainty.
The NIESR’s report adds that Brexit means the government will have to increase borrowing by £50 billion ($67 billion), while inflation will also rise by 3% in the next 18 months thanks to the falling value of the pound.
And that is just a “short-term economic consequence of the vote,” in the view of Simon Kirby of the NIESR:
“We expect the UK to experience a marked economic slowdown in the second half of this year and throughout 2017. There is an evens chance of a ‘technical’ recession in the next 18 months, while there is an elevated risk of further deterioration in the near term.”
To try to avoid a recession the NIESR says that the Bank of England should take “as much of a sledgehammer as they can” against the potential Brexit fallout by increasing its quantitive easing program and cutting interest rates, which are still at 0.5%.
While the fill impact of the Brexit vote is still unclear the short-term effects on the UK economy are already apparent, with small-time investors pulling £3.5 billion of funds out of the UK in June, when the EU referendum vote took place. This outflow is much bigger than it was at the height of the 2008 financial crisis, where £581 million was withdrawn.
But the rest of Europe seems to be doing ok. A composite PMI released by Markit today shows the final July figure is 53.2, up from the 53.1 composite reading in June. Chris Williamson, Markit’s Chief Economist, said Brexit did not seem to be a big deal for the Eurozone:
“A welcome uptick in the final PMI numbers presents a slightly better picture than the slowing signalled by the earlier flash reading, and is especially encouraging as it suggests the region saw little overall contagion from the UK’s ‘Brexit’ vote.”
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