UK could fall into a recession after Brexit, say economists

The UK could fall into a recession forcing the Bank of England to ease monetary policy further after the country voted for Brexit on Friday, according to a Reuters poll of economists.

When the UK voted to leave the European Union by 52% to 48% on Friday, sterling plunged to its lowest level since 1985.

Reuters surveyed 70 economists and strategists and they said sterling would fall further, while GDP would flat-line in the second half of the year and there was a median probability of 53% that the UK would fall into a recession.

Bank of England (BoE) governor Mark Carney said the monetary authority would consider whether to make further policy changes but there was little room to move.

Before the referendum, the same economists polled on Friday had predicted the UK would grow by 0.5% in both remaining quarters of 2016. The pound reached a 31-year low in the aftermath of the referendum vote, declining by 8% on Friday as HSBC cut their 2017 GDP forecast from 2.1% to 0.7%.

The Reuters poll revealed that sterling might fall in next three months to reach lows of $1.28, about 7% below its then current rate of about $1.37. By the end of June, sterling could weaken to $1.34 and fall further by the end of July to reach 1.30 at the end of September.

During the financial crisis in 2009, the Monetary Policy Committee (MPC) cut the bank rate to 0.5% and started a £375bn quantitative easing drive.

In the poll, 19 out of the 75 economists said the MPC would cut Bank Rate after Brexit, five said it would top up its asset purchase program and 21 said there would be a combination of the two. No economist expected policy tightening.

Higher import costs as a result of the weak pound would see inflation reach 3% in the next two years. The BoE’s target was 2%. This would make it problematic for the MPC to balance growth while regulating prices.

Monex Europe analyst Ranko Berich said: “Today is already the most volatile day in sterling’s history, after the pound fell almost 12% as it became clear that initial market optimism about a remain vote was woefully misplaced.

“We’ve seen a fairly substantial rally from today’s lows but this could end up creating headaches for the BoE, which may not be able to rely on massive currency weakness as a natural pressure release valve for the economy. If sterling rallies much further the BoE is likely to be forced into easing in the near future, especially if the economy slips into recession as many models indicate it could”.