Credit Suisse: There’s a 1 in 3 chance of a Brexit-induced recession in the next 6 months – Business Insider



dive cold water
The economy could be about to take a
dive.

David
Gray/Reuters


  • Credit Suisse predicts a one-third chance of recession
    in the next six months.
  • That has actually fallen from 38% in July, but remains
    close to its highest level since 2009.
  • Sliding PMIs in the services sector are leading
    recession indicator, bank argues.

LONDON — There is a one in three chance of a UK recession within
six months, according to Swiss banking giant Credit Suisse.

The bank argues in a paper released on Monday 23 October, two
days before the
UK’s better than expected GDP data
, that the weak trend in
services PMIs in the year and a half since the referendum point
to further sluggish overall growth for the UK economy.

“Service sector PMIs lead UK GDP growth, and are now consistent
with growth slowing toward 1%,” UBS’ UK economics team, led by
Andrew Garthwaite write.

Growth slowing towards 1% is the bank’s central case, but a
recession is also a potential.

“Our economists, using a probit regression model, estimate that
there is a 33% probability of a UK recession on a six-month view
– close to the highest reading since 2009,” the bank writes.
“Their model uses the real policy rate, real oil prices, the OECD
leading indicator, inflation, the unemployment rate, real equity
prices, real house price inflation and real credit growth as
inputs.”

Here is the chart from Credit Suisse’s team:UK recession prediction credit suisse oct 2017Credit Suisse

A technical recession occurs when an economy contracts for two
consecutive quarters. If the UK’s GDP were to shrink 0.1% in both
the third and fourth quarters of 2017 that would be considered a
technical recession.

However, in the hypothetical (and highly unlikely) scenario that
the economy shrunk by 1.1% in Q4, grew 0.1% in Q1 of 2018, and
then contracted a further 1% in Q2 of 2018, that would not
strictly count as a technical recession.

Credit Suisse’s recession probability is now a little lower than
it was in July
when the bank’s models assigned a 38% chance of the UK economy
contracting for two straight quarters.

In its note this week, Credit Suisse said Brexit has
had a negative impact on growth and the UK’s position in global
growth standings.

The pound has slumped, inflation has shot upwards (hitting its
highest level in over five years last month), real wage growth
has stagnated, and GDP growth has slowed significantly.

All of these negatives, if not solely caused by the vote to leave
the EU, have certainly been exacerbated by Britain’s impending
exit from the bloc, the bank argues.

As Garthwaite and team write, over the coming years the UK will
experience “a growth rate which is clearly underwhelming relative
to that elsewhere, and relative to the growth of the last five
years (which has averaged 2.1%).”

Essentially, the economy will be much worse off in several years
time than it would have been had Britain voted to remain in the
UK, and will increasingly fall behind the competition — namely
major eurozone economies like Germany, France, and Italy.

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