UK to avoid a recession, says Moody's as it revises emerging market outlook

Britain will avoid a recession but the economy will slow down in wake of the Brexit decision, according to credit rating agency Moody's, which also raised the outlook for emerging markets.

Moody’s Investor Service said the impact of the referendum result could be relatively low as it predicts the weak pound will support UK economic growth, while monetary and fiscal policies are loosened to mitigate the effects of growing economic uncertainty.

In August, the Bank of England lowered interest rates for the first time in seven years to 0.25% from 0.5%, and added to its quantitative easing programme to stimulate the economy.

The credit agency predicted the UK economy will grow 1.5% in 2016 and 1.2% in 2017.

This is higher than August's revised forecasts from the Bank of England, which slashed its estimate for gross domestic product (GDP) growth to 0.8% in 2017 from previous expectations of 2.3%, and those from independent thinktank the National Institute of Economic and Social Research (NIESR), which said it expects the UK to grow by 1.7% in 2016 and slow to 1.0% in 2017.

Madhavi Bokil, Moody’s vice president and senior analyst, said: “Uncertainty around the future of the economy outside the common market will continue to dampen business investment and consumer spending, as businesses hold back on hiring and making long-term investments, and as consumers postpone large spending decisions.

“However, the fall in the sterling will mitigate some of the negative effect in the short term by providing a boost to exports. Our baseline growth forecasts also incorporate the assumption that some fiscal loosening and monetary policy accommodation will support the economy, eurozone limiting the slowdown in growth.”

There is also no expectation there will be a significant fall in house prices or a decline in consumption.

Europe and emerging markets

The eurozone area is expected to grow at 1.5% in 2016 and 1.3% in 2017 and Moody’s expects “limited Brexit-related spillovers” to eurozone economies.

The credit rating service also revised up its outlook for the world’s emerging market economies for this year and 2017, calculating emerging markets to stabilise overall due to a recovery in commodity prices and a return of capital flows.

Individually, Brazil, Russia and China were revised up, but Turkey and South Africa were lowered.

China’s GDP outlook was raised to 6.6% this year and 6.3% in 2017. Brazil is expected to contract about 4% this year and return to positive growth in 2017. Russia, which contracted by 3.7% in 2015, is expected to fall further this year but grow 2% in 2017.

Bokil added: "We're seeing a certain amount of stabilization... capital flows seem to be back in a fairly strong way and across regions. Relative to earlier in the year, financial market volatility has come down, and in the case of emerging markets in general we're seeing some improvement."

Concerns remain

However, Moody’s does not predict a global economic boom.

Bokil said she thought there was a "nexus" of low trade growth, low investment and slow productivity gains which will could dampen potential growth rates globally.

She said: “A concerning aspect of this current environment is that the lack of fiscal buffers, combined with the limited scope for effective monetary accommodation, has reduced the ability of authorities in many economies to support economic activity in the event of future systemic and idiosyncratic shocks”.

Moody's also expects the US Federal Reserve bank to hike interest rates and resume its tightening cycle at the end of the year and suggested that a Donald Trump presidency was an immediate economic risk.

“The political and geopolitical risks of a rise in nationalist and protectionist pressures… The most immediate risk in this context is an outcome in the upcoming US presidential elections that ushers in an administration that would renegotiate global trade pacts and security alliances.”