In its first set of published projections since the UK voted to leave the EU, the IMF has downgraded its forecasts for global, eurozone and UK growth. In addition, the Fund says that the UK will be the worst affected of all the advanced economies – a view that Dun & Bradstreet shares given that Britain faces the largest amount of uncertainty and change. The financial markets were largely unfazed by the release of the IMF report, given widespread expectations for more substantial downward revisions. In the event, the IMF reduced its UK growth estimate for 2016 by only 0.2 percentage points to 1.7%, and even though it cut back its 2017 estimate more sharply it nevertheless remains firmly in positive territory at 1.3%. These forecasts are based on the rather optimistic assumption that the UK and EU will broadly maintain their existing trade and financial relationship. However, with the UK government loath to accept a deal that preserves the free movement of labour, unfettered access to the single market and the continuation of full ‘passporting’ rights for the City are far from guaranteed.
The IMF has pointed to financial market resilience in the weeks following the referendum as a key factor supporting its relatively sanguine baseline projections. Indeed, global markets have stabilised and risk assets have recovered relatively quickly from their post-Brexit sell-off. However, it is important to remember that market reactions tend to be volatile and short-termist, while the economic facts on the ground take more time to filter through. In this context, we believe that the current market respite will prove temporary, with the UK economy now passing through the eye of the storm. In contrast to what the IMF forecasts appear to imply, we continue to expect the UK to enter a technical recession at some point between the second half of this year and the first half of 2017. A number of forecasters concur with our more pessimistic view.
While post-Brexit official data on the economy will not be released for some time, anecdotal evidence suggests that firms are already scaling back investment and hiring plans, while the housing market has started to show signs of cooling. Our full-year growth forecasts for 2016 and 2017 currently stand at 1.3% and 0.4% respectively and our UK risk rating remains at DB2c (downgraded from DB2a immediately after the vote).
Looking ahead, we believe that while the UK will emerge from its short-term economic woes, it will not escape unscathed. The vote to leave the EU will have a long-term impact on the trajectory of the economy – whatever the eventual outcome. And with Prime Minister Theresa May having recently announced that Article 50 will not be triggered this year, the ongoing lack of clarity will continue to hamper business activity and could trigger further periods of Brexit-related market volatility. Indeed, with a new government at the helm, trying to navigate the UK economy through previously unexplored territory to a yet-undetermined destination, the journey ahead remains long, fraught with uncertainty, and full of hazards. Companies and investors with business interests/operations in the UK and EU should continue to monitor
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