Analysts are predicting the UK is heading for a recession following the vote to leave the UK confirmed this morning.
Stock markets have reacted strongly following the result, with the FTSE 100 down 6.7 per cent and the FTSE 250 down 10.3 per cent in the first half hour of trading this morning. The FTSE 250, considered a closer reflection of the UK economy than the FTSE 100, was down over 12 per cent at one point this morning, a bigger fall than Black Monday in 1987, although it has recovered to a fall of 8.41 per cent as at 11.30 today, still a bigger fall than on any other day in the last 29 years.
The pound has fallen to its lowest point against the dollar for 30 years following the shock result, falling from $1.50 at 21.50 yesterday, 10 minutes before polls closed, to a low of $1.32 this morning, a fall of 12 per cent.
Analysts at LGIM and Royal London Asset Management say political uncertainty over the UK’s access to EU markets has already held back investment and this will increase, creating the likelihood that the economy will fall into recession.
LGIM European economist Hetal Mehta says: “Whatever you think of the long-term costs/benefits of leaving the EU, it seems fairly clear that there will be a significant short-term economic adjustment cost. From a global perspective, ‘Brexit’ had been identified as a major concern by various international bodies, such as the G20 and IMF, and had topped the list of market concerns among surveys of fund managers.
In the UK, there is plenty of evidence that greater uncertainty about the business environment has already been weighing on business investment. Measures of corporate investment intentions, for example, fell sharply in the run-up to the referendum. This is likely to deteriorate further in the immediate aftermath.
Consistent with the Treasury’s assessment ahead of the vote, our base case has now shifted to a UK recession in the second half of 2016.This is likely to be triggered by a short-term retrenchment in both corporate and consumer spending.
On the back of this recession, expectations for interest rate hikes by the Bank of England are firmly off the table. Instead, the focus will now switch to how the Bank can support the economy through this period of adjustment. We do not expect interest rates to drop below zero as in Europe, but a small cut in policy rates and additional quantitative easing are a likely policy response, alongside credit easing measures and liquidity provision.
Royal London Asset Management chief investment officer Piers Hillier says: “On the back of this morning’s result we expect the UK will fall into a recession. Unfortunately I see unstable market conditions lasting for between three and five years whilst new trade agreements are drawn up.
“It is our view that the UK Government will be left with no choice but to stimulate the economy through fiscal and monetary means, flooding the system with liquidity if necessary.
“As an investment house, our portfolios are constructed in such a way that they provide resilience across a whole range of possible economic outcomes. We will not be making any knee jerk changes to our portfolios until the direction of travel becomes much clearer. We have always invested for the long-term and, as such, believe over the long-term total returns are likely to ride out the short-term volatility we will see.
“For those investors and savers who have a shorter-term investment horizon, we highly recommend they consult a regulated financial adviser before making any changes to their investments or savings.
Hargreaves Lansdown head of pensions policy Tom McPhail says: “For long term pension investors who may be seeing the value of their retirement savings falling today, the key message is to do nothing unless you have to. We are likely to experience a period of volatility in the markets and uncertainty in the wider economy, in these conditions, acting in haste is unlikely to serve well. For those years from retirement and making regular savings, then the message is just keep going; falls in the market mean buying investments at a lower price.
“For those close to retirement, the message is try to avoid selling funds and shares right now. Annuity rates may move in response to changing interest rates, however this is not certain. International and domestic demand for gilts and sterling denominated investment grade bonds will influence annuity rates, as will expectations of inflation and to a lesser degree, short term interest rate movements.”