Britain’s vote to leave the EU will plunge the country into a shallow recession in the second half of 2016, which could see the unemployment rate rise to 6.5 per cent, the equivalent of around 500,000 jobs.
In a gloomy analyst note titled “Mayday! Mayday!”, Credit Suisse cut its GDP forecast to 1 per cent down from 1.8 in 2016. It also said the unemployment rate could rise from 5 per cent to 6.5 per cent.
“On the back of our forecast for GDP growth falling to 1.0 per cent in 2016 and -1.0 per cent in 2017, we can expect the unemployment rate to jump up to 6.5 per cent by the end of 2017,” Credit Suisse analysts said.
“This expected rise in unemployment is likely to squeeze nominal household incomes as wage growth takes a hit. This may occur with a lag, as has been evident by the puzzling sticky response of wages to falls in unemployment in the UK over the past few years,” they added.
The latest figures by the Office of National Statistic (ONS) showed the unemployment rate dropped to 5 per cent in the three months to April, the lowest reading since 2005.
This represent 1.67 million people out of 33.26 million people classed as available to work in the UK, according to the ONS. An increase from 5 per cent to 6.5 per cent would thus leave roughly 491,000 people currently in work out of a job, according to an estimate by Business Insider.
Sonali Punhani told the Independent that Credit Suisse was more comfortable giving a rate than the precise number of jobs that could be lost.
The rising unemployment combined with higher inflation and the resultant squeeze of household income will also hit the so far “robust” consumer sector, as Britons will be forced to tighten their belts, Credit Suisse predicts.
Ahead of last month's vote, the Treasury warned that a vote for the UK to leave the EU would lead to two quarters of negative growth – which would last for a year and leave the level of UK GDP 3.6 per cent lower in two years’ time.
Unemployment would be 520,000 higher, wages 2.8 per cent lower and house prices 10 per cent down, the Treasury found.
Credit Suisse warning echoes those of BlackRock, the largest asset manager in the world with $4.6 trillion under management as of 2015.
BlackRock analysts on Tuesday said Britain will be plunged into a recession this year. They also predicted the country will be plagued with lower economic growth for another five years because of the shock decision for the UK to leave the EU.
6 ways Britain leaving the EU will affect you
6 ways Britain leaving the EU will affect you
1/6 More expensive foreign holidays
The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more
2/6 No immediate change in immigration status
The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay
3/6 Higher inflation
A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum
4/6 Interest rates might rise
The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output
5/6 Did somebody say recession?
Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018
6/6 And we wouldn’t even get our money back
All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget
Richard Turnill, chief investment strategist, on Tuesday said that firm's “base case” is recession, meaning at a minimum, it expects the UK GDP to fall for two successive quarters in a row.
But the Bank has also heavily hinted that a rate cut will come in August to support a weakening economy.Reuse content