Global Macro Views

As French President Francois Hollande explained in the aftermath of the UK referendum result that it would exit the European Union, “What was once unthinkable has become irreversible.” In thinking about the possibilities in advance of the June 23rd vote, we placed 60% probability weight on a “remain” victory and 40% on “leave.” Our modal outlook at that time envisioned subpar global economic growth by historical experience, supported by increased monetary policy accommodation in Europe and Japan and a glacially slow normalization of the stance of Federal Reserve policy. The steadier expansion of Asian emerging market economies helped to stabilize commodity prices and pull along the world economy.

In any event, the "leave" victory poses considerably more economic and political challenges, especially for Europe. Especially concerning was the initially haphazard political response in the UK, which was associated with greater economic uncertainty and larger swings in relative prices than expected. In recent days, the announced quicker handover of the prime ministership raises the likelihood of a "civilized divorce" from the EU. Still, the process will be messy and drawn out, posing a drag on UK spending.

Our current outlook is now last time's alternative: real GDP growth has been marked down by 1% this year and by 2.2% next. This implies that we expect the UK to be in recession in 2017. The BoE will cut rates soon in response to the changed outlook, perhaps embarking on QE later in the year. The weakness of a key trading partner and appreciation of the euro led us to lower the Euro area outlook 0.1% in 2016 and 0.8% in 2017. The ECB will adjust its bond-buying program soon and ease additionally in September. Low inflation will prove to be an ongoing challenge.

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