Britain to narrowly dodge recession as economy flatlines: Reuters poll

September 15, 2016 2:49 AM EDT

Rain clouds pass over Canary Wharf financial financial district in London, Britain July 1, 2016. REUTERS/Reinhard Krause


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By Jonathan Cable

LONDON (Reuters) - Britain is now expected to narrowly dodge a mild recession that was widely predicted after the country voted to leave the European Union, but the government will still need to add fiscal stimulus to support growth, a Reuters poll found.

Before - and soon after - the June 23 referendum economists were almost united in saying a vote to leave the EU would send the country into a mild recession based on an assumption that the government would move swiftly to start the divorce process.

But as the likely date of that first move has been pushed off until early next year or later, a survey of around 70 analysts taken in the past few days shows many have tempered their views.

They gave a median 35 percent chance of a recession in the coming year, down from 60 percent in a July poll.

"The near-term hit to the economy won't be as severe as many of the pessimistic pre-referendum forecasts. Indeed, while the economy has clearly slowed after the vote, the probability of a recession appears to have diminished," said Scott Bowman at Capital Economics.

But growth will be weaker than if Britons had voted to remain in the bloc. The economy will grow 1.7 percent this year and 0.7 percent next, still sharply lower than the respective 1.9 and 2.1 percent forecasts given in a June poll based on assumptions the country would vote to remain in the EU.

In an August poll GDP was forecast to contract a mild 0.1 percent this quarter and next, but the latest prediction is for no growth this quarter and a 0.1 percent expansion next.

Prime Minister Theresa May has still not triggered Article 50, the move that will formally start a two-year countdown to Britain's departure from the EU, and there is no clarity on what kind of deal the two sides will strike or even want.

Without that, it is hard for economists to predict the path for the economy. A majority of them polled said the government should invoke Article 50 either at the end of this year or in early 2017.

FISCAL STIMULUS STILL COMING

Britain's economy showed its clearest sign to date of bouncing back from the initial shock of June's vote earlier this month, but a big slowdown in growth and a further Bank of England rate cut remain on the cards.

A closely watched monthly gauge of the country's giant services industry reported a record leap in activity in August, echoing similar data for the much smaller manufacturing and construction sectors.

The labor market also showed little sign of taking a hit after the country's Brexit vote as official data showed the unemployment rate held steady and job creation rose in the three months to July although growth in wages slowed, possibly signaling tougher times ahead for households.

The BoE chopped 25 basis points from borrowing costs, restarted its quantitative easing program with a 60 billion pound top-up and announced two new stimulus schemes in August. It is not expected to do anything when it meets on Thursday.

Instead it will wait until November to act again, trimming another 15 basis points from Bank Rate, sending it to a new record low of 0.1 percent, an unchanged prediction from a Sept. 6 poll.

No top-up is predicted to the just-expanded 435 billion pound asset purchase program. Nearly all, 31 of 37 economists, who answered an additional question said monetary policy alone is not enough to support the economy and thought the government would have to add fiscal stimulus.

"Monetary policy has pretty much exhausted all possibilities and short of radical solutions such as helicopter money, further monetary expansion would simply be a repeat of what we have seen already," said Peter Dixon at Commerzbank.

"With long-term interest rates at their lowest in history, it would be wise to make use of them to fund a modest fiscal expansion as an insurance policy against a sharper downturn."

Last week, Finance Minister Philip Hammond played down expectations of a surge in public spending to offset the economic hit from the Brexit vote but said he could fund modest infrastructure projects if needed.

He signaled any stimulus in the budget update he is due to announce on Nov. 23 is likely to be modest.

(Polling by Sarmista Sen and Kailash Bathija)



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