Brexit could push UK into recession next year, says European Commission

In its first assessment for the euro area and the European Union since the UK referendum, the European Commission cut its growth forecasts for the UK, saying it could slip into recession next year.

“Depending on the dimension and duration of the uncertainty shock, the impact on investment could even lead to recession in the most-affected regions such as the UK,” the EC said.

The Commission pointed out that the leave vote has resulted in financial market volatility, abrupt exchange rate changes and a substantial increase in uncertainty. These factors, along with uncertainty resulting from what is likely to be a drawn-out period of exit negotiations have the potential to damage the recovery in the EU.

“The UK’s vote will affect not only the UK but also the rest of the EU economy through several transmission channels, mainly uncertainty, investment, trade and migration.

“In the near term, the main impact will be a large increase in uncertainty, both economic and political. These factors are expected to slow private consumption and investment growth and to impact on foreign trade, mainly in the UK, but also in the other member states.”

The EC said Britain was likely to endure a slowdown, with growth of between 1.3% and 1.6% this year, down from a previous estimate of 1.8%. For 2017, it estimates growth of just 0.3% to 1.1%.

The Commission expects growth in the eurozone to moderate in 2016 to between 1.5% and 1.6%, and to 1.3% to 1.5% in 2017.

“Due to the lack of information about the possible new equilibrium after the UK’s exit from the EU and the adjustment path associated with it, many elements have not yet entered this first assessment but constitute substantial risks to the outlook for growth and inflation.”