The UK has voted to exit the EU. As expected, the UK was quite divided in the decision. Northern Ireland, London, Scotland and Wales were predominantly voting for staying in the EU. Excluding London, England was mainly voting for an exit. Scottish National Party and First Minister Nicola Sturgeon have argued already that it wants a second independence referendum as a key argument for staying in the UK was the EU membership. There are concerns if similar demands will come up in EU-positive Northern Ireland and Wales.
Actually, the EU referendum is just advisory; however, the results are expected to have implications for what takes place next. But, nothing can be ruled out and uncertainties are expected to prevail for certain time.
The UK economy is likely to fall into recession in the second half of 2016 or in early 2017. This will most likely result in an increase in unemployment with a lag, said Danske Bank in a research report. Moreover, the UK is expected to a register decline in investments in the second half of 2016 because of greater uncertainty regarding the future economic scenario for British companies. There is also a possibility that greater uncertainty will lead to deceleration in private consumption.
Meanwhile, the 2017 growth outlook will depend on the progress of the withdrawal negotiations. The macro economic consequences in the longer run will depend on the future relationship between the UK and EU, according to Danske Bank. The adverse effect might be minor if several partial agreements are reached; however, the negative impact might be major if there are no agreements made.
Meanwhile, the likelihood of recession might compel the Bank of England to loosen monetary policy in the next six months in order to underpin the economy. The central bank has mentioned that it prefers cutting the Bank Rate before utilizing other measures. The BoE is expected to do both eventually.
“We expect the BoE to cut the Bank Rate down from 0.50% to 0.00% and to resume the Asset Purchase Facility (APF), which we anticipate will be expanded in the range GBP150-200bn”, added Danske Bank.
The BoE Governor Mark Carney has excluded the possibility of a negative Bank Rate because of worries regarding bank profitability.
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