UK: Expected to enter a shallow recession post Brexit - NAB

Tony Kelly, Senior Economist at NAB, suggests that the UK is expected to enter a shallow recession post Brexit and while direct implications of this for the world economy aren’t large, the spillovers to other countries or regions could lead to a more significant impact on the world economy.

Key Quotes

“The most obvious concern is Europe, whose share markets have already been hit hard.

UK slowdown has relatively little impact on global growth. The main risk to global growth comes from the extent to which financial market disruptions and uncertainty also impact other countries, in particular the rest of Europe.

Nevertheless, even before exit occurs, there can be an impact on the UK economy. This reflects several, inter-related, factors:

• The referendum result has created lots of uncertainty -the form exit will take, and the nature of the UK’s future relationship with the EU is unknown. This is most obviously a concern for businesses that trade with the EU, but also for individuals employed by those firms, and for others such as EU nationals residing in the UK (will they able to stay?).
• Increased uncertainty is generally a negative for economies. It can result in financial market volatility and lead to risk aversion and market stress. Faced with an uncertain future, businesses may defer investment decisions and households may defer major purchases.
• While studies of the long-run economic impact vary from the positive to the negative, the general finding is that the impact will be negative for the UK. This reflects the impact on productivity from a less open economy, the direct impact on trade from tariff and non-tariff barriers with the UK’s major trading partner (the EU),the possibility of reduced net immigration, and industry specific issues such as the loss of ‘passporting’ rights for the financial sector.

Expectations of reduced future income can have an effect now, particularly in forward looking markets such as share markets. Any wealth affects can also affect consumer behaviour.

With exports to the UK only a small part of other major economy trade this might suggest a limited impact on the global economy.”