HSBC: Brexit may be merely the 'precarious calm' before the real storm

We’ve seen a swathe of reports from investment bank economists this week and all of them say something similar — Britain’s exit vote from the EU is going to dampen economic activity and wipe a percentage point or more off UK GDP.

Some even think the UK is now heading into a recession. For instance, Citi analyst Ebrahim Rahbari and his team said today that he was revising down UK GDP growth “sharply” by 3 percentage points over 3 years, putting Britain at risk of a recession in the second half of this year.

But Karen Ward, chief European economist at HSBC, says that might be the good news.

In a note to investors dated June 28, she downgraded her eurozone GDP growth forecast from 1.5% next year, to 1%. But she noted that the slowing growth would exacerbate the political problems that inspired the Brexit vote in the first place — a poor underclass alienated from the economic elite, which is using its power at the ballot box to be as disruptive as possible.

HSBC Karen WardHSBC / screengrabHSBC analyst Karen Ward

In other words, Ward argues, the Leave majority could become worse off as the economy falters, making their anger at the elites even worse than it is now. In a video essay for HSBC clients she said Brexit may merely be a “precarious calm” before something even worse happens:

“This, overall, is still very, very bad news for the outlook for Europe.”

“It’s again a story of managing to keep the recovery hobbling along but due to much more stimulus both from the ECB and government spending. Less private sector expansion, more public sector expansion, and all the while we’re just muddling through. We’re not solving some of the key underlying problems, such as income inequality, high unemployment, and a disenfranchised youth — which is what is fuelling support for populist parties around Europe. And as we’ve seen with the UK last week those risks can materialise — so this remains a very precarious calm.”

Here is a map from the research and consultancy firm Eurasia Group of European countries that look most politically unstable. Right-wing and anti-immigrant parties in France, Slovakia, Netherlands, Denmark, and Sweden are asking for their own referendums:

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