Brexit poses downside risks to European and global economic outlook - RBS

Andy Cates, Research Analyst at RBS, suggests that the result of the UK referendum clearly suggests further downside risks to the European and broader global economic outlook in the period ahead.

Key Quotes

“That’s partly because markets have not anticipated a leave outcome. And the resulting financial market volatility is almost bound to take a toll on economic growth in the period immediately ahead. Generic uncertainty about what that outcome will imply for the UK and broader EU economy is also going to weigh on consumer and business sentiment.

In our view the European economies that are most exposed to UK-related contagion are Greece, Portugal, Spain, Ireland and Italy (i.e. the periphery). That’s by virtue of their underlying exposure to financial market turbulence and question marks about the future of the EU. We would add France, the Netherlands and Sweden to this list by virtue of other economic and political considerations such as UK trade and financial exposures (e.g. in France and the Netherlands) and their relative degree of hostility toward the EU at present (e.g. in Sweden and the Netherlands).

Today’s outcome reinforces our view that the ECB will take some further policy action in the coming weeks. Admittedly the ECB’s CSPP and TLTRO operations have only just begun but the Governing Council will surely err on the side of caution and accelerate its monthly asset purchases and might cut interest rates again possibly as soon as the 21st July meeting. We do not believe – at this time – that prospective developments will trigger an activation of an OMT programme in the near term.

It is admittedly somewhat futile to put precise numerical estimates on how the EU and broader world economy will be impacted by this outcome. All we can say with any confidence is that uncertainty about the outlook will climb, and perhaps very sharply. Global PMI surveys will probably shift down by at least 1 point on average over the next 3 months consistent with a drag of at least 0.3 percentage points to global GDP growth in Q3 2016."