Another one of the world’s biggest financial institutions has predicted that the uncertainty surrounding the UK’s future following the vote to leave the European Union will push the country into recession by the end of 2016.
In a new note to clients sent on Tuesday afternoon, analysts at Morgan Stanley are the latest to forecast a technical recession for the British economy, spurred on by lower investment into the country and a slowdown in consumer spending.
Morgan Stanley’s “UK Macro Summer Outlook” note, compiled and written by economists led by Jacob Nell, suggests that any recession in the UK will be “shallow” and not be drawn out for much longer than two quarters. The economists also suggest that overall growth in 2016 will be roughly 1.2%, with growth in 2017, just 0.5%, down from a previous 2.3% forecast.
Here is the key extract from the economists (emphasis ours):
In the immediate aftermath of the vote to leave the EU, our judgement is that a pullback in investment, combined with a consumer slowdown, will be enough to lead to a technical recession, i.e., two successive quarters of negative growth. Thereafter, we see recovery, helped by a robust policy response and improved trade, but a weak recovery, as ongoing uncertainty continues to weigh on investment and hiring.
Overall, we expect the UK to avoid a deep or protracted recession unless there is some additional shock, not in our base case, such as a sharp and more prolonged period of sterling depreciation or an abrupt correction in the housing market which triggers a sharp rise in precautionary savings and fall in consumption.
Here is more from the bank on why it thinks a recession is coming (emphasis ours):
We think that longer-term economic decisions, especially investment and hiring decisions, are most likely to be deterred by the likely prolonged period of uncertainty now facing the UK. This would chime with the evidence on the pattern of activity during the pre-referendum period of uncertainty, when we saw weakening investment and a sharp slowdown in hiring, but little discernible impact on the consumer, with strong retail sales.
Nell and his team identify two key drivers of the uncertainty that will plunge Britain into recession. First, despite Theresa May taking over as prime minister and the creation of a new government, the British political landscape is still rocky.
A combination of the small government majority and divisions over Europe are two key points of uncertainty: “When the eventual settlement with the EU surfaces, it is unlikely to satisfy everyone, raising the risk of political divisions and early elections.” Morgan Stanley also adds that the potential for a new Scottish referendum and eventual secession from the UK presents a key threat to stability.
On top of the uncertainty in British politics, Morgan Stanley notes that the lack of clarity on the UK’s continued trading relationship with the EU following the Brexit vote will help contribute to the start of the recession.
The bank’s prediction of recession makes the bank the latest in a long line of institutions predicting some form of recession in the aftermath of the UK’s Brexit vote. Among those institutions to forecast recession is Credit Suisse, which argued last week that the coming slowdown will cost Britain 500,000 jobs. Barclays has also said Britain is “on the cusp of recession.”
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