The UK will narrowly avoid a recession, but only if it stays in the single market for another two years and the Bank of England exhausts its policy toolbox to prop up the economy, a leading ratings agency has said.
Standard and Poor's (S&P), said the UK's vote to leave the EU will knock more than half off its potential growth in 2017 and 2018, and shave 0.8 percentage points from the size of the EU's potential economy by the end of 2018.
In a note published this morning, S&P said: "We think the UK will barely escape a fully-fledged recession caused by Brexit, but the downside risks are numerous.
"We assume the Bank of England will slash its policy rate to zero by the very end of 2016 and restart its quantitative easing programme in 2017, despite a pickup in inflation caused by the weaker pound."
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S&P added that its forecasts were subject to a number of optimistic assumptions, including a "rather benign outlook for the housing market ... that access to the single market is maintained in 2017 and 2018, and that the Bank of England succeeds in keeping turmoil in financial markets in check."
The governor of the Bank of England Mark Carney said last week he expects to cut interest rates over the summer. He is also expected to cut the capital requirements he places on banks in order to make sure lending to the real economy does not dry up over the next few months.
"For the Eurozone, despite the increased uncertainties and the hit to foreign demand resulting from Brexit, we do not at this point expect the recovery to stall. However, we estimate the Brexit effect will cost the Eurozone 0.8 per cent of GDP over 2017 and 2018," S&P added.
A number of organisations have published significant revisions to their growth forecasts for the next few years. Three-quarters of economists polled by Bloomberg expect the UK to dip into a recession at some point in the next 18 months, and the consensus estimate is for the economy to expand by just 0.4 per cent in the whole of 2017.