UK economy to fall into technical recession in H2 or early 2017 – Danske Bank

Research Team at Danske Bank, expects the UK economy to fall into technical recession in H2 or early 2017.

Key Quotes

“Unemployment is likely to rise, with a lag. The main driver will be higher uncertainty about the future economic environment for British firms, which we expect to cause a drop in investment. It is also likely that private consumption will slow due to higher uncertainty. The growth outlook will depend on how the negotiations progress. Whether or not there will be an impact on the UK economy in the long run will also depend on the outcome of the negotiations. If a good trading relationship is maintained, investments will likely resume. If not, the UK and Europe could be significantly worse off economically.

The Bank of England (BoE) is likely to respond to the recession by easing monetary policy. The BoE has communicated it prefers to lower the Bank Rate before using other tools. We expect they will need to do both eventually, though. We expect a rate cut from 0.50% to 0.00% and an expansion of the Asset Purchase Facility by GBP150-200bn. A negative Bank Rate has been ruled out by BoE Governor Mark Carney due to concerns over bank profitability (but he is not the first one to do so).

We expect the euro area to fall into a technical recession along with the UK driven by falling investment due to higher uncertainty. This will also affect trade negatively, but to what extent depends on the future relationship between the UK and the EU.”