Welcome to a world of uncertainty, courtesy of Brexit

Dubai - Prolonged period of policy doubt to weigh on UK's economic, financial performance

Britain's vote to leave the European Union is bad news for the UK economy - certainly in the near and medium term - and will significantly impact its gross domestic product this year, experts say.
Nigel Green, founder and CEO of deVere Group, warned that the Brexit is a victory for uncertainty across international financial markets - and volatility is just beginning.
Moody's Investors Service said this heralds a prolonged period of policy uncertainty that will weigh on the UK's economic and financial performance. It expects that over time, the UK and the EU would come to an arrangement to preserve most - but not all - of their current trading relationships.
"Heightened uncertainty will likely dent investment flows and confidence, weighing on the UK's growth prospects - a credit negative for the UK sovereign and other UK debt issuers," Moody's Investors Service said in a report on Friday.
Howard Archer, chief UK and European economist at IHS Global Insight, said financial markets have certainly taken the view that the decision to leave the EU is bad news for the UK in the near term at least. Sterling has plunged to a 30-year low against the dollar (moving from $1.50 to below $1.35), while the FTSE is set to suffer substantial losses.
"Following the UK's decision to leave the EU, IHS is substantially cutting its GDP growth forecasts to 1.5 per cent from two 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," Archer said in a statement to Khaleej Times.
Norman Villamin, chief investment officer for private banking at Union Bancaire Privée (UBP), and Patrice Gautry, chief economist at UBP, said the Brexit should drive the economy into a technical recession in second half of 2016 and in 2017 (in the minus-3/minus-1 per cent range) due to lower consumption and a fall in capex.
"The unemployment rate is expected to rise next year [by probably one/1.5 point from the current five per cent]. As the current account deficit is large [around seven per cent of GDP], the dependence to capital flows is large, pointing towards potential substantial fall of the pound. Inflation could rebound in parallel, with an upside risk of around three per cent," they said, adding that the most impacted sectors will be real estate, bank, advertising and manufacturing.
Green of deVere Group said Britain is filing for divorce from the EU - and it's a shock event. The Brexit victory is a victory for uncertainty across international financial markets. "Brexit-triggered volatility is now only just beginning; we can expect it to potentially last up to two years," Green told Khaleej Times.
"Due the far-reaching impact of this vote, Brexit will inevitably affect the British and the European economies and the wider global financial markets. The decision may have been taken in the UK but it will impact the rest of the world too."
"Investors around the world on Friday will pile into safety and prompt a significant shift in global markets from risky assets to safe havens. The world's currencies, equities and bonds are now on magical mystery tour - at least in the short-term."
Archer said major economic and political uncertainty will be a fact of life for some considerable time, likely weighing down markedly on business and household confidence and behaviour, so dampening corporate investment, employment and consumer spending.
"Weaker asset markets and tighter credit conditions are seen further hampering UK growth, while the housing market could suffer a marked downturn. Financial sector activity in the City of London may well be hit quickly," he said. Archer said foreign investment into the UK 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.
"We expect the Bank of England to cut interest rates from 0.50 per cent to 0.25 per cent before long and it could also very well resuscitate quantitative easing. We suspect that growth will become the main concern within the Bank of England," he said.
He said the Monetary Policy Committee will be prepared to look through any near-term spike in inflation from a weakened pound. The Bank of England will likely take the view that the weakened growth outlook means it will be harder to hit the two 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," he said.
- muzaffarrizvi@khaleejtimes.com