Banking giants reverse predictions of post-Brexit ‘Brecession’

A worker looks at his phone at the Canary Wharf business district in London. © Eddie Keogh
Two of the City’s biggest powerhouses have scrapped their predictions of a post-Brexit recession which would see the UK economy collapse following the EU referendum, and now envisage better-than-expected results in the third financial quarter.

Both Credit Suisse and Morgan Stanley believe the latest growth figures suggest there is little chance of a so-called ‘Brecession’ in 2016 and 2017.

Surveys by the banks showed an upward tilt in three of the country’s main industries – services, manufacturing and construction – in the month of August. But experts warned that Brexit might still mean slower growth than usual over the coming months.

“Given the resilience of the data, combined with some political stability and the fact that people do not know how much Brexit will affect them, we now expect subdued growth, but not a recession,” said Credit Suisse economist Sonali Punhani.

Her group boosted its 2016 growth predictions from 1 to 1.9 percent and next year’s from a negative 1 to a 0.5 percent increase. A Treasury survey from early August showed Credit Suisse among the institutions most pessimistic about the state of the British economy.

At Morgan Stanley the numbers were similar – a small increase in growth for 2016 was pushed up from 1.2 to 1.9 percent. The prediction for 2017 was by a smaller margin though, with the economy recovering by 0.5 to 0.6 percent.

Morgan Stanley told Business Insider UK it believes there are three reasons behind the economy’s slowdown after Brexit: “First, the EU and the associated trading arrangements are of crucial importance for the UK economy, since the EU accounts for about half of the UK's international trade and investment.

“Second, we expect high and protracted uncertainty over the future arrangements, with the negotiations set to last a long time and a wide spectrum of possible outcomes.

"Third, we think the risks are tilted towards a hard exit, with significantly reduced UK access to EU markets, given the UK political objective of increased national control over borders and laws.”

The banks agreed the bigger shock will come once EU leaving processes are put into action through the triggering of the much-discussed Article 50.

“We expect current resilience will be undermined over time by firms holding back on investment and hiring, and an erosion of purchasing power, as the weaker GBP drives a pick-up in inflation,” Morgan Stanley’s Melanie Baker added.