Morgan Stanley economists join Goldman Sachs in revising Brexit outlook

London: Morgan Stanley followed Goldman Sachs Group Inc. in predicting the UK economy will prove stronger than economists anticipated in the immediate aftermath of the vote to leave the European Union (EU).

Scrapping their previous forecast of a recession, Morgan Stanley said in a report on Tuesday they now expect the economy to grow 1.9% this year rather than 1.2%. Goldman Sachs’s team said on Monday it projects growth of 0.9% next year, faster than the 0.2% it previously penciled in.

The revisions reflect a run of data that suggests the British economy is rebounding from the shock of June’s Brexit vote. The question is whether the fortitude can be sustained enough to prevent the Bank of England from unleashing fresh monetary stimulus this year.

“Previously, we had expected an immediate reaction to the vote to leave, but, in practice the reaction has been muted, or rapidly reversed,” said Morgan Stanley’s economists including Melanie Baker and Jacob Nell. “Current resilience will be undermined over time by firms holding back on investment and hiring.”

BOE response

The BOE unveiled a package of stimulus in August, including its first rate cut in seven years, and said more easing could come as it slashed its growth forecasts. The central bank will ease again in November should the economy expand around 0.1% in the third quarter, while limiting its response to an interest-rate cut of 10 basis points if it performs a bit better, the Morgan Stanley economists said.

Much depends on how the outlook evolves relative to the BOE’s projection for 0.1% growth, with the analysts predicting an expansion of more than 0.3% would force policy on hold. While governor Mark Carney is due to testify to lawmakers in parliament on Wednesday, the Office for National Statistics won’t publish its first estimate of how the economy fared in the third quarter until 27 October.

Data released Monday showed a gauge of UK services jumping the most on record in August, enabling Brexit secretary David Davis to declare the UK is entering talks on leaving the EU in a “position of strength.” The pound rose for a fifth day against the dollar, its longest winning streak since March.

Clarity needed

“Owing to an expectation of additional macro-policy stimulus in the coming months, we now expect a shallower downturn,” the Goldman Sachs analysts, led by Huw Pill, wrote. Additional monetary and fiscal stimulus means “we now expect the UK economy to avoid even the ‘technical recession’ that we had foreseen immediately after the referendum.”

Still, HSBC Holdings Plc economist Elizabeth Martins said in a report on Tuesday that it was premature to announce an all-clear for the economy amid doubt over investment plans and a lack of clarity on what deal the government will strike.

“We therefore need to see a marked rebound in investment intentions before we can conclude that our post-referendum fears were overblown,” she said. “It is too early to conclude that the UK economy will prove resilient.” Bloomberg