Brexit uncertainty ‘should push British economy into recession’

Uncertainty following Britain's decision to leave the European Union will be sufficient to push its economy into recession by the turn of the year, according to research by analyst Davy.

Following the result, the outlook for the UK economy has “deteriorated sharply”, according to the report, which said UK GDP would grow by just 1.2 per cent in 2016 and 0.2 per cent in 2017.

“We believe the uncertainty will be sufficient to push the UK into a recession through the turn of the year 2016/2017 based on a 10 per cent peak-to-trough contraction in business investment by early 2017,” it said.

Davy is forecasting a 2.1 per cent rise in consumer spending in 2016, slowing to a marginal 0.1 per cent gain in 2017.

“We expect investment to contract by 1.5 per cent in 2016 and 3 per cent in 2017,” said the report. “We now expect UK employment to grow by just 1.1 per cent and 0.1 per cent in 2016 and 2017 respectively – so that productivity growth is flat and companies limit their firing of employees.

“This means the unemployment rate rises from an average of 5.2 per cent in 2016 to 6.5 per cent in 2017.

“Our forecasts imply that the UK will suffer two quarters of negative GDP growth through the turn of the year, with GDP up just 0.1 per cent in Q3 2016, falling by 0.3 per cent in Q4 2016 and by 0.2 per cent in Q1 2017.”

The report said a 10 per cent contraction in business investment “should trigger recession”.

“We have based our forecasts on a 10 per cent fall in business investment, peak-to-trough, similar in magnitude to the early stage of the 1990s recession and the aftermath of the ICT bubble in the early 2000s,” it said.

“This contraction should be sufficient to stall not only investment intentions but also employment and the pick-up in wage growth we had previously expected.

“Our view is that the UK slowdown in H1 not only reflected Brexit uncertainties but also the fiscal adjustment and a smaller stimulus from energy prices – these factors will depress growth in 2017.”

Davy added that its UK economic outlook was “especially uncertain”, with substantial revisions to its forecast likely.

“There is no survey evidence or short-term indicators to gauge the negative impact of the Brexit referendum,” it noted.

“The timing and magnitude of any fall in business investment are also highly uncertain. In addition, we cannot discount the possibility that UK politicians may successfully reassure investors that EU single market access will not be threatened – which could limit the impact on sentiment.

“At the same time, stretched household finances and the UK housing market are clear risks that could lead to a deeper slowdown.”