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Brexit will plunge the UK into a recession in the next year, BlackRock says

Brexit will contribute to uncertainty that will damage growth prospects, the world's largest asset manager has said

Hazel Sheffield

Wednesday 13 July 2016 10:47 BST

BlackRock is the largest asset manager in the world with $4.6 trillion under management as of 2015 (Getty Images)

Britain will be plunged into a recession this year and be plagued with lower economic growth for another five years because of the shock decision for the UK to leave the EU, BlackRock analysts have said.

BlackRock is the largest asset manager in the world with $4.6 trillion under management as of 2015. Richard Turnill, chief investment strategist, has 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.

"Our base case is we will have a recession," Turnill told reporters at a meeting on Tuesday.

“There's likely to be a significant reduction of investment in the UK," he added, noting that Brexit will contribute to uncertainty that will damage growth prospects.

BlackRock believes that Mark Carney will announce an interest rate cut from historic lows of 0.5 per cent as early as Thursday and expand its quantitative easing bond buying programme.

“The market is not entirely priced for that yet,” said Scott Thiel, BlackRock's deputy chief investment officer and head of global bonds.

May's Brexit vision

Market reaction to a further rate cut could see the value of the pound slip further, losing gains made this week after Theresa May was named as the next UK prime minister.

Sterling scraped below $1.28 last week, reaching lows not seen since 1985, but has since rebounded to trade around $1.32 against the dollar.

BlackRock said it prefered emerging market bonds, developed market investment grade corporate debt and some bank debt from the eurozone periphery in this market environment.

6 ways Britain leaving the EU will affect you

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1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

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

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6 ways Britain leaving the EU will affect you

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

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6 ways Britain leaving the EU will affect you

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

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6 ways Britain leaving the EU will affect you

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

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6 ways Britain leaving the EU will affect you

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

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6 ways Britain leaving the EU will affect you

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

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Tobias Davis, head of corporate treasury sales at Western Business Solutions, said that around 70 per cent of the market has already priced in an interest rate cut when the Monetary Policy Committee meets on Thursday.

"The market is pricing 70 per cent chance of a cut to 0.25 per cent, however I think otherwise and believe they will save their bullets for next month.

"[There are] rumours that Carney will look to purchase corporate bonds to form part of his impending stimulus program,“ Davis said in a note to investors.

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