UK risks a shallow recession, BOE to cut rates by 50 bps

The Barclays Research Team now believes that the UK will likely leave the European Union (EU) without a deal. Therefore, it sees the UK economy facing a recession and the Bank of England (BOE) cutting the interest rates next year.

Key Quotes:

“In the light of recent political developments, particularly the policy statements of the new administration - since Boris Johnson was voted in as the new leader of the Conservative Party and therefore the prime minister - we change our central working assumption from expecting the agreement of a withdrawal deal by the end of the year, to the UK departing the EU without a deal, either on 31 October, or shortly thereafter, if, for example a snap election has been called that delays the current 31 October deadline.

In contrast to Theresa May's administration, we believe that the government is committed to no-deal if necessary, and possibly has greater room to deliver it.

We consequently expect the country to enter a shallow recession in 2020 and the Bank of England to cut rates by 50bp by mid-2020, despite some initial jump in inflation on the back of the attendant currency depreciation. The government would also likely bring forward an emergency budget containing new spending measures that would help mitigate some of the negative impact on growth.

We believe the risks to our forecasts are tilted to the downside: a deeper recession could take hold should the expected disruption and confidence effects of a no-deal out turn be larger than expected.”

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