Our views

World moves to 'Plan B'

Ian Kernohan, Economist

24 June 2016

Given the sharp rise in uncertainty for households and firms, it now seems sensible to assume a UK recession in the second half of this year, with spending decisions postponed until the situation becomes clearer.  The longer-term impact on economic activity depends on the new trading arrangements which the UK must now negotiate with the EU and the rest of the world.  As of today, the UK remains a member of the EU and new arrangements will take some years to arrange. 

Following the fall in sterling, the Bank of England has recognised the risk and indicated its ability to support the currency if the need arises. A weaker sterling will act as a support for economic activity and help to attract the capital inflows necessary to finance the large current account deficit, but it will also push up import inflation.  I would expect the UK Government’s fiscal strategy to be reassessed in the light of these events: while the budget deficit is still high relative to the rest of the G7, there is some room to slow the pace of fiscal austerity, especially when Government borrowing costs are so low.

US Federal Reserve rate hikes will now be off the table until after the November election.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.