Following the UK’s vote to leave the European Union most big banks in the City of London severely cut growth forecasts, with most expecting the country to fall into a recession in the second half of 2016.
However, after a recent wave of economic reports revealing that the fallout of the Brexit vote has not hit the economy as hard as expected, economists are revising growth forecasts – now forecasting growth not contraction.
Morgan Stanley and Credit Suisse have raised their growth forecasts for the UK, cancelling predictions of an EU referendum vote-led recession in the second half of the year.
The revisions come after official data showed that the UK’s dominant services sector has been performing much better than expected, in addition to anticipated stimulus from the Bank of England and the Government.
Morgan Stanley increased its forecast for third-quarter GDP growth from a 0.4% percent contraction to 0.3% growth.
The investment bank raised its forecast because of the latest data “from a sharp slowdown and Brecession, to a lesser slowdown, which narrowly avoids a technical recession”.
“Data has come in stronger than expected,” Morgan Stanley analysts said, adding: “Previously, we had expected an immediate reaction to the vote to leave. But in practice, the reaction has been muted, or rapidly reversed.”
Credit Suisse is similarly more optimistic about the British economy compared to a couple of months ago. It now expects 2016 growth of 1.9%, up from its previous forecast of just 1% growth, and increased its 2017 forecast to 0.5% from 1% contraction.
Sonali Punhani, an economist at Credit Suisse, was quoted by The Financial Times as saying that the shock of Brexit was “materially less than we expected in late June”.
“Given the resilience of the data, combined with some political stability and the fact that people do not know how much Brexit will affect them, we now expect subdued growth, but not a recession,” she added.
Martin Beck at the EY Item Club similarly said: “The strong recovery … suggests that the likelihood of a recession this year is looking more remote”