Goldman Sachs predicts UK will enter ‘mild recession’ in 2017


The Brexit aftershocks were as swift as they were strong. In the days after UK citizens voted to leave the European Union a petition for a re-vote garnered 3.7 million signatures, the Scottish first minister said the Scottish parliament could try to block the UK’s departure, and global equities – – especially UK banking stocks – are taking a pounding. And to top it off, this pessimistic prediction from Goldman Sachs: Brexit could plunge the British economy into a mild recession in 2017.

In a research analysis published Sunday evening, three Goldman Sachs economists concluded that heightened uncertainty and the likely deterioration in the UK’s terms of trade in a post-Brexit world could subtract a cumulative 2.75% to UK GDP. “We now expect the economy to enter a mild recession in early 2017,” wrote economists Jan Hatzius, Jari Stehn and Karen Reichgott. years at 1.25%.”

Goldman’s forecasts are consistent with those published by other economic forecasters. On Friday, S&P Global Ratings said it expects the fallout from Brexit to cut eurozone GDP growth by 0.5% in 2017, while UBS economist David Tinsley said said UK output growth will slow to “around zero in the second half of 2016 and early 2017”, with longer-term impacts depending on the kinds of trade deals the UK strikes with the EU. In his worst-case scenario, Tinsley sees the potential for a permanent and recurring 3% decline in UK GDP.

And on Monday afternoon, S&P lowered its UK’s long-term foreign and local currency sovereign credit ratings to ‘AA’ from ‘AAA’ on the belief that the victory of the ‘leaving’ camp in the referendum ‘will weaken the predictability, stability and effectiveness of policy-making in the UK and affect its economy, GDP growth and fiscal and external balances. »

The ratings agency said on Monday that while Britain’s economy has grown faster than almost any other European economy over the past 9 years, that growth is no longer guaranteed. “GGiven the uncertainties and the fall in investments linked to the “leave” vote, we expect a significant slowdown in 2016-2019, with GDP growth averaging 1.1% per year (compared to 2.1% per year in april). Lower investment will affect growth, job creation, private sector wage growth and consumer spending,” S&P said.

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The economic outlook is much better across the Atlantic. Partly because US exports to the UK are only around 0.7% of US GDP and partly because banks are better placed to weather shocks than they were 8 years ago , economists largely agree that Brexit does not impose a Lehman-type policy. threat to the US economy. “So even if the UK falls into recession as a result of Brexit, which PNC now considers a 40% chance, the hit to US exporters will be small,” said Bill Stone, chief investment strategist at PNC.

Goldman economists also share this view. Although they cut their forecast for U.S. economic growth in the second half of 2016 to 2%, they also noted that one of the main differences between the financial crisis and today is that banks around the world are better capitalized than ‘they weren’t in 2007. Moreover, they added, “major central banks are highly concentrated on preventing systemic financial events and continuing to have extensive safety nets in place.”

With the notable exception of George Soros, Brexit as “not the next financial crisis” has become a popular topic of discussion since the announcement of the referendum results. In public comments on Monday, Prime Minister David Cameron and Chancellor of the Exchequer George Osborne struck that note in an attempt to calm markets. “We are equipped for whatever happens,” Osborne said in remarks to the UK Treasury on Monday morning. “And we are determined that, unlike eight years ago, the UK financial system will help our country cope with and mitigate all shocks – without contributing to or making them worse.”

In a speech to parliament on Monday, Cameron said Britons should “build confidence that Britain is ready to face what the future holds from a position of strength. Through our long-term plan, we today we have one of the strongest major advanced economies in the world.”

Interestingly, the continued strength of the UK economy in a post-Brexit world could have negative ramifications: Goldman economists say that while the UK economy is holding up better than expected, the “political risks to the integrity of the rest of the European Union have increased significantly”. With nationalist groups in countries like France, the Netherlands and the Czech Republic (or Czechia, as it will soon be known) clamoring for their own independence referendums, a relatively painless Brexit could “make Frexit, Nexit or Czexit more appealing, “Hatzius, Stehn and reichgot write. “In turn, such campaigns could raise new questions about the future of the eurozone that may require much more aggressive intervention by the European Central Bank.”

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This post has been updated to include information on the UK’s credit rating downgrade by S&P Global Ratings on Monday afternoon.


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