Cazenove's Kate Rogers predicts the economic outlook of a post-referendum Britain.
Economic growth forecasts for the UK and eurozone have been downgraded following the vote for Britain to leave the EU.
In the short term, the uncertainty is likely to lead to a fall in investment as businesses and consumers wait for clarity on the UK’s new trade agreements before committing themselves. We have cut our 2017 UK growth forecast in half and are expecting a slowdown, although we are not currently forecasting a recession.
Thankfully, at just over 4 per cent of global GDP, the UK slowdown is not significant enough to derail the world economy. Easier monetary policy will also help soften the blow and global growth is only slightly lower post the referendum.
Inflation: expectations increase
Sterling has fallen significantly since the referendum result and this is expected to be inflationary, as imported goods will become more expensive. Our forecasts indicate an additional increase in CPI of 1 per cent over the next 18 months.
Monetary policy: UK interest rate cut in August?
Policy makers are responding by providing market liquidity and we are likely to see the Bank of England cut interest rates. We are expecting a cut of 0.25 per cent at their August meeting.
Outlook
As the markets continue to process the outcome of the referendum, it is clear that the implications are complex and long lasting. The wide range of 2017 UK GDP forecasts, highlights the high degree of uncertainty. The UK market has punished domestic earners, with the larger more international companies significantly outperforming since the vote.
We continue to see a lack of value in bonds, particularly with the anticipated pick up in inflation, and prefer to diversify into alternative approaches such as absolute return. Where we hold cash, we view it as a defensive asset, to provide us with liquidity to take advantage of any unwarranted weakness.
Equity markets are likely to remain volatile, but should be supported by monetary policy. The outlook for UK commercial property has not been helped by the vote, but we believe that attractive rental yields should underpin values. We maintain that diversification will be crucial in navigating markets over the next few months as our interpretation of the political and economic landscape evolves.
Key indicators
Source: Bloomberg, July 2016.
- UK GDP growth QoQ: Q1 growth slowed to +0.4 per cent from +0.7 per cent in Q4 2015.
- UK GDP Growth YoY: Q1 growth up +2.0 per cent YoY from +1.8 per cent in Q4 2015.
- Inflation RPI (June 2016): +1.6 per cent YoY.
- Wage inflation: +2.3 per cent YoY.
- Unemployment rate: 5.0 per cent.
Kate Rogers is head of policy at Cazenove Charities. Civil Society would like to thank Cazenove for their support with this article.
