Britain Likely Facing Mild Recession; BoE Expected to Cut Rates in November: Reuters Poll

By Jonathan Cable

LONDON – Economists participating in a recent poll indicate that Britain’s exit from the European Union has begun to nudge the economy into a mild recession, with many anticipating further cuts to interest rates by the Bank of England in November.

Before the Brexit referendum on June 23, projections suggested that growth would remain close to the 0.6 percent achieved in the second quarter. However, the latest forecasts predict a contraction of 0.1 percent for both the current and following quarters—enough to satisfy the technical criteria for a recession. The poll, comprising nearly 60 economists, expects only modest recovery next year.

Samuel Tombs from Pantheon Macroeconomics remarked, "The recession will largely be driven by sharp falls in business investment over the coming quarters." He explained that many companies are likely to postpone investment until there is greater clarity regarding the future of the single market and to assess the overall impact of Brexit on other firms.

The National Institute of Economic and Social Research indicated that the economy began to decline in July. Additionally, recent PMI surveys suggested that the contraction is occurring at the fastest rate since the financial crisis of 2008-09. While the Bank of England did not paint as bleak a picture as the PMI data, it acknowledged a slowdown in growth in business services and a decrease in consumer spending last month.

In July, the Bank surprised markets by maintaining its stance, but earlier this month it reduced the Bank Rate by 25 basis points to a historic low of 0.25 percent. It also revived its asset purchasing program with a £60 billion addition, alongside announcing two new stimulus initiatives.

This unexpected stimulus prompted British gilt yields to plunge into negative territory for one of the largest descents in their 300-year history. With limited space for further easing, the consensus in the poll suggests that the Bank will refrain from increasing its current £435 billion quantitative easing program for now.

However, in the aftermath of the most recent meeting, the Bank signaled that most policymakers expect to bring the main interest rate closer to zero in the near future. The median forecast from the poll indicates that the Bank Rate might be further reduced to 0.1 percent in November.

Peter Dixon at Commerzbank predicts that a rate cut is quite likely, especially with expectations of a weaker economic performance in the second half of the year. He remarked, "I suspect that the effective lower bound is around 0.1 percent."

Bank of England Governor Mark Carney has ruled out negative interest rates, a tactic some other central banks have employed, and 19 of 23 economists concurred that he was justified in this stance. Dixon noted, "While it might be unwise to completely rule out any policy option, it seems that the limits of monetary policy have been reached and that the government needs to act."

Finance Minister Philip Hammond has stated that he will assess the government’s tax and spending policy in an upcoming budget update. Economists have urged him to consider a program of debt-financed investments to support the economy.

More than two-thirds of the economists who responded to an additional question expect significant fiscal stimulus from the government during its Autumn Statement.

Simon Wells at HSBC noted, "Despite the fanfare, a 25 basis point rate cut and more quantitative easing cannot be expected to have a substantial macroeconomic impact. If the economy worsens, fiscal policy may provide a more immediate remedy."