Warnings that Britain may slip into recession

Britain’s economy may slip into recession next year following the vote to quit the EU.

That is according to the European Commission in its first assessment of the economic impact of Brexit. The IMF, meanwhile, has cut global growth projections following Britain’s decision to leave the EU.

Last week economic affairs commissioner Pierre Moscovici said the cumulative negative impact for UK GDP would be between 1% and 2.5% by 2017.

Estimates prepared by the commission staff and released yesterday give more precise figures than those provided by Mr Moscovici and add a breakdown for this and next year.

Britain is expected to endure a “substantial slowdown” which will limit its economic growth to between 1.3% and 1.6% this year, lower than earlier estimates of a 1.8% growth.

The commission’s simulations project a much worse situation for next year, when Britain may experience a 0.3% contraction in the worst scenario.

In the most optimistic scenario Britain’s GDP would grow 1.1% in 2017, still much less than the previously forecast 1.9% rise.

The Brexit vote “will affect not only the UK but also the rest of the EU economy through several transmission channels, mainly uncertainty, investment, trade, and migration,” said the commission.

It estimated that GDP growth in the eurozone would moderate marginally in 2016 to 1.5% and 1.6%, and slow further in 2017 to between 1.3% and 1.5%.

In the commission’s latest economic forecasts released in May, the eurozone was expected to grow 1.6% this year and 1.8% in 2017.

The commission said that this assessment of the Brexit economic impact could change since the referendum had created an extraordinarily uncertain situation.

However, it said Brexit had “generally increased risks to the outlook, particularly on the downside”.

In forecasts also released yesterday, the IMF scrapped its forecast for a pickup in global growth this year, citing Britain’s decision to leave the EU.

The IMF sees global GDP rising 3.1% this year, down from April’s 3.2% projection and equal to growth in 2015, according to the fund’s quarterly World Economic Outlook. The 2017 forecast was cut to 3.4% from 3.5%.

The IMF’s new forecast is based on the assumption that British and EU officials reach new trade agreements that avoid a “large increase in economic barriers”.

However, if talks break down, Britain will slip into recession as more financial institutions relocate to the eurozone and consumption and investment contract more than expected, the fund said.

Meanwhile, figures showed sales of London homes under construction slumped 34% in the second quarter as the prospect of a vote to leave the EU damped demand already hurt by higher taxes.

The number of residences sold before completion fell to about 4,600 from 6,974 a year earlier, according to data compiled by researcher Molior London. A spokesman for Molior declined to comment.

“The approaching referendum added more layers of uncertainty,” said Tom Bill, head of London residential research at broker Knight Frank.

“That’s adding to the two-year slowdown from the December 2014 tax increase, which is still the biggest damping factor,” he said.

* Reuters and Bloomberg


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