World Economy
0

53% Chances UK May Fall Into Recession

53% Chances UK May  Fall Into Recession 53% Chances UK May  Fall Into Recession

Britain's decision to leave the European Union could drive the economy into recession and will force the Bank of England to ease its already ultra-loose monetary policy further.

According to 70 economists and strategists polled by Reuters on Friday, sterling will fall further and there is a median 53% chance of a British recession. Gross domestic product would flatline in the second half, they said.

Before the referendum they had predicted 0.5% growth in both quarters.

"The vote to leave the EU has clearly weakened the near-term outlook for the UK economy," said Jonathan Loynes at Capital Economics.

Bank of England Governor Mark Carney said the BoE would consider in the coming weeks whether to take additional policy responses but it has little room to ease.

Over seven years ago, in the depths of the financial crisis, the Monetary Policy Committee cut bank rate to a record low 0.5% and embarked on a £375 billion ($513 billion) quantitative easing program.

A Reuters poll published earlier this month suggested the first rise would come in early 2017. But in Friday's poll, 19 economists said the MPC's next move would be to cut bank rate, five said it would top up its asset purchase program and 21 said there would be a combination of both. Not one expected a tightening of policy.

Interest Rate Cut

"Given the current very low rate of headline inflation and muted inflation expectations, we expect the BoE to cut interest rates toward zero (but not below zero) fairly swiftly to support economic activity," said Daniel Vernazza at UniCredit.

"The MPC could also restart asset purchases if UK financial conditions tighten severely."

The leave vote hammered sterling which plunged to its weakest level against the dollar in 31 years, before recovering slightly. It was still down 8% by mid-morning Saturday in London.

Foreign exchange strategists predicted more pain ahead.

The consensus from Friday's poll was that sterling could fall to as low as $1.28 in the next three months, almost 7% weaker than its current exchange rate of around $1.37.

Panic Everywhere  

Global financial markets plunged and sterling sank to its lowest since 1985 after Britons voted by nearly 52-48% on Thursday to break away from the world's biggest trading bloc.

Britain's shock vote to pull out of the European Union wiped $2.1 trillion from global equity markets Friday as traders panicked in the face of a new threat to the global economy, AFP reported.

Investors fled to the safety of gold, the yen and blue-chip bonds as the seismic shift in the structure of Europe left many huge questions hanging, including who will lead Britain following the resignation of Prime Minister David Cameron.

The Brexit vote sparked 8% losses in the Tokyo and Paris bourses, nearly 7% in Frankfurt and more than 3% in London and New York.

Financialtribune.com