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UK expected to swerve recession

UK expected to swerve recession

Economic growth would be slower but recession could be avoided in the event of a no-deal Brexit, according to consultancy firm EY's latest economic forecasts.

The consultancy firm expects UK economic growth for 2019 to be 1.5 per cent if the UK leaves the EU in March with any form of deal, while an exit with no deal would mean GDP growth of 0.7 per cent this year, and 0.6 per cent in 2020.

Mark Gregory, chief UK economist for EY, said predicting the health of the economy in a no-deal Brexit is fraught with difficulty.

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He said: "Forecasting the impact of a 'no-deal' Brexit is very difficult, not least because we don't know what this would entail and what the response would be by policymakers.

"It is possible to argue that there was too much pessimism after the referendum and the same will be true again. In a no-deal scenario, it is likely that sterling will come under pressure and business confidence will fall as it did in 2016.

"However, consumers appear to have less capacity to keep spending if their incomes are squeezed in the current environment compared to 2016 and the global economy is unlikely to provide the boost it did at that time." 

Policy responses he predicted in the case of a no-deal Brexit could include cuts to interest rates from the Bank of England, or increased government spending to make up for the decline in economic growth caused by other measures.

Ed Smith, head of asset allocation research at Rathbones, said he expects the UK economy to grow slowly in the years ahead, regardless of the Brexit outcome.

He said the decline in business investment and productivity growth in recent years means there is little scope for UK economic growth to accelerate, whatever the Brexit outcome.

The Bank of England now forecast that the long-term average growth rate for the UK economy will be about 1.5 per cent.

The UK grew by 1.2 per cent in 2018, and Mr Smith said any significant stimulus to the economy from the government, or from a soft Brexit, would have limited impact as it would likely create inflation as it would economic growth.

If an economy is achieving its average long-term rate of growth, then any significant stimulus would be expected to contribute more inflation than economic growth, according to Mr Smith.

Mr Gregory said one likely outcome of a no deal exit from the EU is that sterling would fall significantly in value.

Guy Miller, chief market strategist at Zurich, said investors should not expect the decline in sterling to have a positive impact if it happens in the coming months as it did in 2016.

He said this is because in 2016 the global economy was growing so there was a steady level of demand for UK exports, but it is likely that with growth slower now, there is no certainty that demand for exports would be as strong in the event of a no deal.