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Europe, Forex

Stalling UK economy risks recession as Brexit nears: NIESR

LONDON, July 22 (Reuters) – Economic growth in Britain has stalled and chances are one-in-four that the Brexit crisis has already tipped the country into a recession, a leading think tank said on Monday.

The National Institute of Economic and Social Research (NIESR) said risks to growth were “heavily weighted to the downside” given that the chances Britain would leave the European Union without a deal were now roughly 40%.

Boris Johnson, the front-runner to become prime minister this week, has said he will ramp up preparations for a no-deal exit to try to force the EU to make changes to the agreement Prime Minister Theresa May made with the bloc but which British lawmakers have voted down three times.

NIESR has previously estimated that Britain’s economy contracted in the April-June quarter.

If Britain’s economy shrinks in the third quarter as well, that would be classified as Britain’s first recession since the global financial crisis.

Last week, Britain’s budget forecasting office also said the country might be entering a full-blown recession. In a report published on Monday, it said prospects for the coming quarters were fraught with danger.

“The outlook beyond October, when the United Kingdom is due to leave the European Union, is very murky indeed with the possibility of a severe downturn in the event of a disorderly no-deal Brexit,” it said.

NIESR cut its forecasts for Britain’s economic growth in 2019 and 2020 to 1.2% and 1.1%, down from 1.4% and 1.6% previously.

It assigned a 30% chance that the world’s fifth-biggest economy would contract in 2020, based on an average of all Brexit scenarios.

“There is no palpable growth for some years to come following a no-deal Brexit,” NIESR director Jagjit Chadha said at a news conference.

Even if Britain’s next prime minister strikes a Brexit deal, there will likely be a hit to the public finances, NIESR said.

“Some loosening of the public purse appears inevitable and we expect public sector borrowing to rise above 2% of GDP with the possibility of substantial over-runs of the government’s fiscal objectives in the event of a no-deal Brexit,” it said.

Both candidates to become prime minister have pledged to ramp up government spending, drawing criticism from current finance minister Philip Hammond.

The result of the leadership race is due to be announced on Tuesday. (Reporting by David Milliken, writing by Andy Bruce; editing by Michael Holden, Larry King)

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