The UK’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.
The poll comes as the Royal Institution of Chartered Surveyors provided new evidence that Brexit was undermining the near-term outlook for the UK housing market, with both demand and sales dropping in July. New buyer inquiries fell for a fourth month, while its index of sales is pointing to the fastest decline in transactions since the global financial crisis in 2008.
Prices continued to rise, but at the slowest pace in three years. Ahead of the June 23 Brexit vote, economists had predicted growth would continue close to the 0.6% achieved in the second quarter, but median forecasts in the latest Reuters poll showed the economy would contract 0.1% 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 by Brexit.”
Britain’s economy started to shrink in July, according to a forecast from the National Institute of Economic and Social Research earlier this week, 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 Bank of England 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 its bank rate by 25 basis points to a record low of 0.25%. It also restarted its asset-buying programme and announced two new stimulus schemes.
That unexpectedly aggressive stimulus package had sent British gilt yields on one of their biggest forays into negative territory in their 300-year history on Wednesday. To give the economy one more shot in the arm, the Bank Rate will be cut to just 0.1% at the November meeting, according to the poll median.
Bank of England governor Mark Carney has dismissed negative interest rates, used by other central banks, as a policy option and 19 of 23 economists who answered an extra question said he was right to do so.
Over two thirds of the economists who answered an extra question said that they expect significant fiscal stimulus from the UK government when it presents its autumn statement.
* Reuters and Bloomberg
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