Economic forecasts slashed in wake of Leave vote

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Economists have cut their UK GDP growth forecasts and predict interest rates will halve in the wake of the UK vote to leave the European Union.

Yesterday’s referendum resulted in 52 per cent of voters favouring a Brexit that will end the UK’s 43-year membership of the EU.

IHS has cut its GDP growth forecasts to 1.5 per cent from 2 per cent for 2016, 0.2 per cent from 2.4 per cent for 2017 and 1.3 per cent from 2.3 per cent for 2018.

Chief UK and European economist Howard Archer says: “Financial sector activity in the City of London may well be hit quickly. Foreign investment into the United Kingdom is expected to suffer (both direct and portfolio).

“Sterling has fallen sharply following the vote to leave the European Union; and while this should help UK exports, it will likely push up inflation thereby squeezing consumer purchasing power and lifting companies’ input costs.”

The firm also expects the Bank of England to cut interest rates from 0.5 per cent to 0.25 per cent as well as predicting it will “resuscitate” quantitative easing.

Archer adds: “The Bank of England will likely take the view that the weakened growth outlook means it will be harder to hit the 2 per cent inflation target in two years’ time.

“Of course, the Bank of England’s position may well be made even harder if there is a sharp flight of capital from the UK after the EU exit vote, thereby exerting pressure for higher interest rates to attract the inward investment that is needed to finance the large current account deficit.”

Centre for Business and Economic Research managing economist Danae Kyriakopoulou says: “Looking further out to the medium term, the UK’s absence in European policymaking will also influence the direction of many EU policies.

“Traditionally, the UK has argued for a more liberal approach to economic policy with an emphasis on deregulation. This is likely to continue even without the UK’s free market voice.”

Capital Economics chief European economist Jonathan Loynes says the “ultimate damage” from Brexit will be less than what the “more pessimistic” projections have predicted.

Loynes says: “After all, the UK will remain inside the EU for at least two years and possibly longer. This will allow time to clear up some uncertainties, not least over the UK’s future trading relationship with the remainder of the EU and the rest of the world. Meanwhile, although sterling’s decline will lift inflation, it should also help to protect the export sector.”