Get Ready for a U.K. Recession, Interest-Rate Cuts and More QE

Mark Carney warned U.K. voters it could happen. Now economists say it’s time to get ready.

Almost three quarters of respondents to a Bloomberg survey conducted after Britain voted to leave the European Union say the economy will slip into a recession for the first time since 2009. A majority also predict that the Bank of England will add more stimulus, including cutting interest rates in the third quarter. Carney, the governor of the central bank, will make a televised speech on Thursday at 4 p.m. London time.

The gloomy forecasts follow the shock June 23 referendum, which leaves Britain in limbo about its relationship with the EU, its biggest trading partner. As European leaders threaten to play hardball in any negotiations on the country’s withdrawal from the bloc, a political vacuum at the top of U.K. government is compounding the negative sentiment.

Carney warned in May that a vote for Brexit could tip the country into a technical recession -- defined as two consecutive quarters of contraction -- having earlier said it posed the biggest domestic risk to U.K. financial stability. Even so, Britons backed “Leave” by 52 percent to 48 percent.

“The U.K. is in a mess,” said Alan McQuaid, chief economist at Merrion Capital in Dublin. “It will most likely be left to the central bank to clean up the politicians’ mess, with Mark Carney and his colleagues probably implementing further monetary stimulus before the year is out.”

Economic Hit

In research published in the wake of the referendum, Goldman Sachs Group Inc. and Bank of America Merrill Lynch were among those forecasting an economic contraction. Both said the impact of the vote could subtract about a cumulative 2.5 percent from GDP.

With the vote prompting Prime Minister David Cameron to resign and leading to turmoil in the opposition Labour Party that saw leader Jeremy Corbyn lose a confidence vote, investors and households seeking reassurance may increasingly look to Carney. 

Within hours of the referendum result, the governor addressed the nation and said the bank was ready to act to support the financial system and the economy if needed. In the Bloomberg survey, in addition to rate cuts, a majority expect the BOE to restart asset purchases, while almost half forecast measures to aid credit.

According to the Bloomberg survey, 71 percent of 35 respondents said the decision to exit the EU will lead to recession. Of the 25 economists who forecast a time period, there was an almost even split between those expecting it this year and those who predict 2017. Just one said it will come later.

Investors also predict policy makers will opt to support growth, with traders pricing in a 34 percent chance of an interest-rate cut at the Monetary Policy Committee’s July meeting, and a 54 percent probability of a loosening in August.

The expansion was already cooling before the vote, slipping to 0.4 percent in the first quarter from 0.6 percent. That may have continued this quarter as uncertainty amid the referendum campaign damped hiring and investment. While reports Wednesday showed U.K. mortgage approvals rose in May and house prices continued their steady advance in the weeks leading up to the vote, the decision to leave may undermine future demand.

According to James McCann, European economist at Standard Life, looser BOE monetary policy “can’t be far off.” He sees a rate cut at the July 14 meeting and asset buying potentially a month later, though that will partly depend on an orderly sterling depreciation.

“The shock to the economy justifies easier policy and the BOE is unlikely to be deterred by a short-term pickup in inflation as sterling depreciates,” he said. “It looked through a similar inflationary bump after the financial crisis.”