Brexit: ‘world’s first DIY recession’?

The British people’s decision to leave the EU has prompted many commentators to speculate that Britain’s economy – and quite possibly the global economy as well – could be severely hit in coming months and beyond in the face of huge economic and political uncertainty.

How likely is a major recession? At T Rowe Price, head of international fixed income Arif Husain puts the chance of global recession at ‘above 50 per cent’. ‘Those who believe Brexit is a UK problem are misunderstanding the impact will have globally,’ he comments, pointing to the knock-on effect of the Greek crisis in 2015.

Richard Buxton, head of UK equities and chief executive of Old Mutual Global Investors, is also concerned at the potential wider ramifications. He quotes chancellor George Osborne description of Brexit as ‘the world’s first DIY recession’.

He predicts ‘two years of uncertainty’ for the UK and European economies, during which ‘inward investment is likely to remain at best muted’, and which ‘has very serious implications for the future of the European Union itself.’

The result could also be a contributory factor in ‘tipping the US economy into recession’.

Philippe Ithurbide, global head of research at European asset manager Amundi, forecasts: ‘Brexit opens a period of uncertainty that will weigh on UK domestic demand and may precipitate the economy in recession.’

He suggests that in the short term the UK could see ‘an increase in the household savings rate (precautionary savings), heightened caution among companies regarding their investment and hiring programmes, and a slowdown in capital inflows.’

In the longer term, he adds: ‘most studies point to a lasting negative impact on GDP and forecast by 2020 a loss of activity of between 3 and 9 per cent in the UK.’

Piers Hillier, chief investment officer at Royal London Asset Management, is similarly gloomy. On the back of this morning’s result we expect the UK will fall into a recession. Unfortunately I see unstable market conditions lasting for between three and five years whilst new trade agreements are drawn up.

‘It is our view that the UK government will be left with no choice but to stimulate the economy through fiscal and monetary means, flooding the system with liquidity if necessary.’

Neil Williams, chief economist at Hermes Asset Management, points out that the extent of economic damage depends to a large extent on the way the exit is handled.

‘The UK economy will of course survive, given its entrepreneurial flair, increasing focus on non-EU trade, and likely policy accommodation by the Bank of England and UK Treasury. However, getting to the next stage looks a long, drawn-out can of worms, leaving considerable uncertainty for UK assets and markets. The extent of this damage now rests on the manner of the exit.

‘The mark-down on assets would surely be greatest in the case of a “hard exit” – entailing an acrimonious departure, lower trade, lower migration, and recession – than the more probable “softer” version.’ But even this latter option will take years to sort out. '

However, Capital Economics believes the outcome ‘will ultimately prove to be less damaging than many estimates have suggested’. Short-term uncertainty will hit the UK economy in coming quarters, with a drop-off in business confidence, the appointment of a new prime minister and the likelihood of calls for another Scottish independence referendum.

But the firm points out that because the UK will remain inside the EU for at least two years, giving time to work out trading relationships with the EU and the rest of the world.

 Additionally, sterling’s decline (down 6 per cent against the dollar at 10am on Friday), although it will drive inflation, ‘should also help to protect the export sector’.

 ‘We have provisionally shaved our forecast for UK GDP growth in 2016 from just above 2 per cent to 1.5 per cent, implying little growth in the second half of the year but no full-blown recession. For now, we expect a similar growth rate next year,’ the report says.

Wealth manager Rathbones, in keeping with many independent forecasters, dismisses the Treasury’s estimate of the short-term impact on economic growth  (3.6-6 per cent lower over two years) and suggests that it will be in the region of 1-2 per cent lower over the next two years, ‘largely from uncertainty alone’.

At Miton, managing director Gervais Williams makes the point that smaller companies could be a useful holding in the face of recessionary pressure. ‘Whilst smaller companies have a higher percentage of domestic earnings than larger companies, generally they tend to outperform when growth is under pressure,’ he says.

‘Many assume that larger companies would be expected to be more defensive.  But during the 1960s, the 1970s and the early 1980s the UK had several recessions, and yet in spite of this UK smaller companies outperformed.’ He adds that the smallest firms outperformed most strongly because of their greater agility and ability to adapt to changing market conditions.   

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