Goldman Sachs economists wrote in a report released Sunday that following its vote leave the European Union (EU), the U.K.  is likely to enter a “mild recession” by early 2017.

The global growth forecast was also downgraded by 0.1 percentage point to 3.1 percent for 2016 by the bank’s economists.

Goldman Sachs’ Jan Hatzius, Jari Stehn and Karen Reichgott wrote that due to the cumulative effects of “increased uncertainty and deteriorating terms of trade,” U.K. gross domestic product (GDP) would take a 2.75 percentage-point hit in the next 18 months.

While the bank predicts that the U.K. would grow at 0.2 percent which is a 1.8 percent decline from its previous forecast, Goldman’s forecast for GDP growth in the U.K. this year was 1.5 percent which notes a 0.5 percentage-point drop from its previous forecast for growth following Brexit.

Three “economic transmission mechanisms” from the shock Brexit vote were listed by the economists of the bank who made the note.

“First, the UK terms of trade are likely to deteriorate, especially if it becomes harder to export high-value added services (including financial services) to the European Union,” the note said.

“Second, the uncertainty about the long term is likely to weigh on UK growth in the short term as firms hold off on investment…Third, outside the UK the main transmission channels are weaker UK demand for imports and—much more importantly—a tightening of financial conditions via a stronger exchange rate and lower risk asset prices,” the bank’ s note for investors further added.

The bank’s economists also predicted a drop for the entire euro zone following the Brexit verdict which was not what the markets had been expecting. Over the next two years, Goldman Sachs’ economists forecast, there would be a fall of 0.5 percentage points for the GDP of the rest of the euro zone and pegged the growth at 1.25 percent. The second half growth rate for the US was also cut by the bank experts from 2.25 percent to 2 percent due to the fall out of Brexit.

“Further downward adjustments could become necessary if global financial markets deteriorate beyond the initial reaction, or if we see greater than expected political and economic contagion into other European countries,” the economists wrote in the note.

Confirming what the market is expecting with reference to the US Federal Reserve, the economists noted that the Brexit shock “has effectively taken a July hike off the table” while they commented on central banks and in particular reference to the US central bank.

There are predictions by markets and economists that while the Bank of Japan may cut at its July policy meeting, they added, the Bank of England was likely to cut interest rates by 25 basis points to 0.25 percent and introduce renewed credit easing.

A basis point is 1/100th of a percentage point.

(Adapted from CNBC)

Categories: Economy & Finance