Saturday 10 December 2016

Vote is already tipping UK into mild recession - analysts

Jonathan Cable

Published 12/08/2016 | 02:30

Bank of England governor Mark Carney has said he won't consider a negative interest rate to boost the British economy
Bank of England governor Mark Carney has said he won't consider a negative interest rate to boost the British economy

Britain's decision to quit the European Union has already begun tipping its economy into a mild recession, according to economists in a Reuters poll, most of whom said the Bank of England would chop interest rates again in November.

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Ahead of the June 23 vote, economists had predicted growth would continue close to the 0.6pc achieved in the second quarter, but median forecasts in the poll showed the economy would contract 0.1pc this quarter and next.

If correct, that would meet the technical definition of recession. Britain's economy would then return to only modest growth next year, the poll of nearly 60 economists taken this week found.

"The recession will largely be driven by sharp falls in business investment over the coming quarters," said Samuel Tombs at Pantheon Macroeconomics.

"Most firms will hold off investment until there is a bit more clarity over whether we are likely to remain in the single market ... and to see how much other firms are impacted."

Britain's economy started to shrink in July, according to a forecast from the National Institute of Economic and Social Research on Tuesday, while last week's Markit/CIPS PMI surveys suggested it is contracting at the fastest rate since the 2008-09 financial crisis.

In its own survey, the BoE was not as starkly downbeat as the larger PMIs but said growth slowed across business services and consumer spending eased last month.

After surprising markets by doing nothing in July, the bank earlier this month cut Bank Rate by 25 basis points to a record low of 0.25pc. It also restarted its asset buying programme with a £60bn top-up and announced two new stimulus schemes.

That unexpectedly aggressive stimulus package sent British gilt yields on one of their biggest forays into negative territory in their 300-year history on Wednesday.

With little room for more easing, the scope for further downside is limited. The poll concluded that for the time being at least, the bank would not top up its now £435bn quantitative easing programme.

Following the meeting, however, the bank said most policymakers expected to trim the main interest rate even closer to zero later this year. To give the economy one more shot in the arm, Bank Rate will be cut to just 0.1pc at the November meeting, according to the poll median.

"With our forecast looking for an even weaker outturn than the BoE in H2, I suspect a rate cut is highly likely and I suspect that the effective lower bound is around 0.1pc," said Peter Dixon at Commerzbank.

BoE Governor Mark Carney has dismissed negative rates, used by other central banks, as a policy option. (Reuters)

Irish Independent

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