UK to avoid recession and world economy to ‘stabilise’ as Brexit shock passes - but US poses biggest risk to global growth
August 18, 2016, 4:07 pm    

Britain will not fall into a recession following the referendum - though growth will slow down, according to Moody`s Credit: paul weston/Alamy

Britain’s economy will slow down but should not go anywhere close to a recession, according to economists at credit ratings agency Moody’s, while growth in the rest of the world is also “stabilising.”

Although markets dived on the referendum result in June, stock prices have recovered and now economists also believe the impact of the vote will be relatively modest, compared with some early fears.

The lower pound should support economic growth in the UK, Moody’s said, while the government is expected to loosen the purse strings to shore up GDP.

Moody’s economists predict growth of 1.5pc this year and 1.2pc in 2017.

“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,” said senior analyst Madhavi Bokil.

“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.”

Moody’s does not expect a major fall in house prices or a big drop in consumption.



The analysts expect only “limited Brexit-related spillovers to the eurozone”, and expect the currency area to grow at almost exactly the same pace as the UK, at 1.5pc this year and 1.3pc in 2017.

Renewed optimism in the state of China’s economy and some rebound in commodities prices also point to a stabilisation of the global picture, analysts believe.

In part as a result of that Moody’s has increased its GDP forecasts for China to 6.6pc this year and 6.3pc in 2017, and for the other G20 emerging markets to 4.4pc for 2016 and 5pc for 2017.

While the analysts believe the economy is stabilising after the turmoil which immediately followed the referendum, they do not predict a boom for the global economy.

Ms Bokil believes there is a “nexus of low trade growth, low investment and slow productivity gains [which will] dampen potential growth rates globally.”

“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,” she said, referring to the fact that governments have little room to borrow and spend more, and central banks have already cut interest rates a long way.

There are risks, however, which could still derail this forecast.

Further hikes in US interest rates would be a sign of confidence in the US, but could also trash valuations of assets such as shares, bonds and currencies across the world, Moody’s fears.

Emerging markets could see a major outflow of cash back to the US in such an eventuality, harming companies and governments which have borrowed in US dollars and suddenly find their domestic currencies are relatively less valuable.



Further disintegration of the EU could also spook markets, while the US presidential election also poses threats.

“The political and geopolitical risks of a rise in nationalist and protectionist pressures,” said Moody’s.

“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.”

Moody`s did not explicitly refer to Donald Trump`s candidacy, but financial markets are increasingly nervous about the prospect of a major shakeup of US policies should he win the Presidency.



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