28 June, AtoZForex – It is a fact that the UK economy will feel the brunt of their decision to exit the European Union. However, how soon and how long the negative hangover will last remains unclear. Goldman Sachs, however, argues that UK will enter recession in 2017 as a result of Brexit.
UK will enter recession in 2017
A Goldman Sachs team of analysts led by Jan Hatzius forecast that UK GDP will fall by 2.75 percent over the next 18 months from the cumulative effects of “increased uncertainty and deteriorating terms of trade.” This puts growth forecast at 0.2 percent in 2017, a massive drop from 2 percent previously.
As argued by Albert Edwards, global strategist at Société Générale that a depreciation of the sterling would actually be good for the currency and the economy at large. Edwards said:
“I would have thought a 20% sterling devaluation is exactly the antidote needed in the current circumstances. After this much-feared event, the UK economy actually recovered strongly and unemployment fell sharply. In a current environment where central banks and governments have failed to generate a strong enough economic recovery to normalize interest rates amid persistent deflationary pressures, one would have thought a substantial decline in one’s currency would be welcomed –for that is one way to inject a modicum of inflation back into the economic system.”
To the contrary, the Goldman Sachs team of analysts believe that since the UK is majorly dependent on the export of high-valued added services (like financial services) to the EU, then a weaker pound will be of limited benefit in terms of trade advantage.
Goldman Sachs wrote:
“Further downward adjustments could become necessary if global financial markets deteriorate beyond the initial reaction, or if we see greater than expected political and economic contagion into other European countries,”
For the European Union (EU), the team downgraded growth forecast to 1.25% over the next two years from 1.75% previously. While also downgrading global growth forecast by 0.1 percentage point to 3.1 percent in 2016.
And these forecasts are subject to further downgrade if the condition of the financial markets gets any worse than they currently are.
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