Since the Brexit referendum, analysts have been busy assessing the impact on economic and financial markets from the U.K.’s shock vote to leave the European Union. Their conclusion? Eurozone and U.K. economic growth will be hard hit in the next few years — and that will force central banks to take action.
Under heavy pressure to react to the June 23 vote, both the Bank of England and European Central Bank expected to provide more stimulus, and analysts believe they’ll deliver.
“Given the uncertainty and likely economic downturn, we expect the BOE to use its financial crises play book. That means ignoring sterling-driven inflation, quickly taking interest rates to, or close to, zero and subsequently restarting QE,” analysts at Bank of America Merrill Lynch said in a note Monday.
BOE Governor Mark Carney signaled last week that rate cuts and other easing measures are likely to come this summer. Its key interest rate currently stands at a record low of 0.5% and hasn’t been cut since March 2009.
But after the uncertainty following the referendum, a rate cut now seems inevitable. Analysts expect the U.K. central bank to slash its rates as early as its July 14 meeting, and then again in August, when it will also give an updated outlook on economic growth and inflation in its closely watched quarterly inflation report.
Investors will get more hints from Carney on Tuesday, when the bank’s Financial Stability Report comes out at 10:30 a.m. London time, or 5:30 a.m. Eastern Time, followed by a press conference at 11 a.m.
U.K. seen sliding into recession
Concerns over the future of the U.K. economy post-Brexit have been a key topic since the referendum was announced in February. Since the ballot in June, GDP forecasts for the country have been consistently slashed.
B. of A. said it now expects three quarters of recession in the U.K., starting in the third quarter of 2016. It cut its GDP forecasts to growth of 1.4% in 2016 and 0.2% in 2017, down from previous forecasts of 2.5% for both. The bank also revised its 2017 eurozone GDP forecast down to 1.1%, from 1.6%.
Citigroup sees U.K. growth of 1.3% for 2016 and 0.9% for 2017, down from 1.7% and 2.1% respectively, while J.P. Morgan forecasts a slowdown in 2017 to 0.6%, from 1.1%.
But the fallout from Brexit is unlikely to be contained just to Britain, and the ECB will have to step up easing as well, according to economists.
“After the Brexit shock, Europe is one step closer to a persistent 1% growth, 1% core-inflation economy,” the B. of A. analysts said.
The region can’t sustain those levels in the long run, either politically or socially, given its high unemployment rate and poor productivity development, they added.