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Analyst warns of UK recession this year over Brexit

Cape Town - The UK can be expected to fall into recession in the second half of the year, which would likely cause unemployment to rise with a lag, Mikael Olai Milhøj, senior analyst at Danske Bank, commented in a survey by international economic forecasts company, FocusEconomics.  

He expects the UK economy to grow 1.0% this year and to contract 0.4% in 2017.

“The UK is likely to be hit by falling investments due to higher uncertainty about the future economic environment for British firms. It is also likely that private consumption growth will slow," said Milhøj.

"The longer-term consequences depend on the future UK/EU relationship and are more difficult to estimate. In the very short term, we expect gross domestic product (GBP) volatility to remain high. We expect euro/pound to stabilise in the 0.85 to 0.90 range. Medium and long-term outlook is very uncertain. Flows, growth and relative monetary policy point towards a weaker GBP.”

READ: Brexit could hurt SA’s economic growth, warns Kganyago

According to the FocusEconomics survey, the UK's GDP deceleration is expected to happen amid a backdrop of low business sentiment, a significantly-weaker currency and a deteriorated outlook for the labour market.

"The unprecedented Brexit vote has reverberated across Europe and the world, and the immediate impact can already be seen in our fresh GDP growth forecasts," FocusEconomics said on Wednesday. It added that it may be years before the full impact of the Brexit vote can be analysed.

"But market volatility is very likely to remain high going forward and a prolonged political vacuum will only add to the uncertainty, all of which will weigh on the currency and the investment outlook," according to FocusEconomics.

Economic analysts that participated in the latest FocusEconomics survey on the UK economy have slashed their forecasts for 2016 and now foresee 1.4% growth - a cut of 0.5 percentage points from the pre-Brexit estimate last month.

READ: Brexit sends tourists flocking to London

Analysts have also revised down their forecasts for 2017 as the fallout from the Brexit will continue to be felt. The FocusEconomics Consensus expects the UK economy to grow 0.3% in 2017, a 1.8 percentage point downward revision from the 2.1% expansion foreseen last month. Among the most pessimistic analysts surveyed are KBC and Credit Suisse, forecasting a contraction of 1.5% and 0.5% respectively for 2017.

Mark McNamee, senior analyst at Frontier Strategy Group, said its revisions assume continued political volatility, particularly driven by a coming Scottish referendum, as well as interest rate cuts by the Bank of England and a major drop in investment amid such continued uncertainty in the market.

Simon Kirby, head of forecasting at NIESR, suggests an impact on GDP in the range of -2.2% to -6.3% in the long-run.

“It is currently unclear whether the government will aim to join the European Economic Area (EEA) or move to a World Trade Organisation (WTO) status. These have rather different implications for the long-run negative effect on the UK economy,” said Kirby.

ALSO READ: Finance Minister Pravin Gordhan speaks out on Brexit vote

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