- Andrew Kelly/Reuters
Recession talk is red hot right now.
The most likely to fall into a recession (which on a country-level basis is thought of as two consecutive quarters of GDP contraction) is obviously the UK.
In fact, some analysts said in reaction to the Brexit that a UK recession was the most likely outcome.
“The feedback-loop between financial market reaction and the real economy will play a crucial role in how forceful global implications will be,” wrote Marvin Barth and the macro-research team at Barclays.
“We expect at a minimum a minor recession in the UK and significant slowing of euro area growth in the year ahead.”
The basic idea is that an exit from the EU would make it more difficult and expensive for the UK to trade with the continent, hurting economic growth.
Jacob Nell and Melanie Baker at Morgan Stanley said that a recession is certainly on the table for the UK, but it primarily depends on the manner in which the country exits the EU.
“In a ‘civilized divorce’ scenario, where the uncertainties are progressively reduced and the economy avoids recession, we see the MPC on hold,” said the economists. “In an ‘acrimonious divorce’ scenario, where the uncertainties interact and amplify each other, we see the economy in a referendum recession by year-end.”
Additionally, the EU is likely to see economic growth, which is already anemic, slow even further, and there is a seriously higher possibility of a recession there.
“I like to think over the longer term countries will figure it out – and will continue to trade with one another – but it could take up to three years to iron out the ‘new order’ and in the meantime economic activity and GDP growth in European countries will feel the impact,” said Mark Bogar of BNY Mellon’s boutique The Boston Company.
“In my opinion the Eurozone will go into recession again during that time.”
- Russell Boyce/Reuters
While the direct impact on the UK and EU are obvious, the risk of contagion to other markets has also risen. Further exits from the EU are possible, and financial uncertainty could spread throughout the globe, which puts the entire world economy at risk of a slowdown according to analysts.
“The vote to leave could result in a global recession,” said Arif Husain, portfolio manager at T. Rowe Price. “It’s likely that the chances of a global recession have risen above 50%.”
Global recessions typically have a higher threshold, though definitions vary. Most economists define a global recession to mean a slowdown to only 2% to 2.5% growth. And while a global recession isn’t necessarily the most likely scenario, the rate at which the idea is popping up is notable.
“On our estimates, global GDP growth would likely fall back below 3% annually in the high stress scenario, thus re-entering the danger zone for a global recession,” wrote the economics team at Morgan Stanley.
“At 2.7% annually in 2017, on our estimates, global real GDP growth would be inching precariously close to the recession threshold of 2.5% annually.”
For the US, there is slightly less fear, as direct exposure to the UK by way of trade is not particularly high and America’s internal dynamics are stronger. However, after the weak jobs report and the flashing of recession fears domestically, another negative shock is not a welcome development.
“Tallying up our … analysis, we see a possible GDP hit of anywhere from 0.2% to 0.6% to US GDP over the next year,” wrote Neil Dutta of Renaissance Macro on Friday. “Taking the high end of the range implies that US growth could slow to 1.5% over the next year.”
While there is still plenty of uncertainty, both economically and politically, following the Brexit vote, the fears of a recession in various parts of the globe are real and rising.