Brexit Decision To Pull UK's Economic Growth Lower: Moody's

New Delhi: Britain's exit from the European Union is likely to result in lower economic growth of the UK, Moody's Investors Service said while lowering its growth projections.

"We expect the vote to leave the EU to result in significant negative impact on UK growth. Our revised baseline growth expectation for the UK is 1.5 per cent in 2016 and 1.2 per cent in 2017, compared with previous estimates of 1.8 per cent and 2.1 per cent respectively," Moody's said in a report today.

Moody's said the June 23 vote of the British electorate to leave the European Union (EU) has heightened uncertainty and a significant negative impact on UK growth prospects.

Lower growth is expected to be primarily driven by a precipitous fall in investment. "At the same time, the fall in the sterling will mitigate some of the negative effect in the short term by providing a boost to exports," it said.

Moody's said a material correction in asset prices, house price downturn or a large decline in consumption represent downside risks to the forecast, and if they materialize then it would prompt the rating agency to revise the baseline.

Stating that it expects limited spillovers to EU growth overall, Moody's said direct trade and real economy linkages between UK and the EU are asymmetric, with UK exposures to the European Union much larger than EU exposures to Britain.

While 48 per cent of UK exports go to the EU, only 7 per cent of the EU exports are destined for the UK.

"Therefore, assuming manageable global financial markets turbulence, there will be limited spillovers to the large EU economies," it said.

Reflecting country-specific developments combined with limited spillovers from Brexit, Moody's has lowered its growth forecasts for Germany, France, Italy and Spain by 0.0 per cent-0.4 per cent.

"Overall, we have lowered our euro area growth expectations to 1.5 per cent for 2016 and 1.3 per cent for 2017, from 1.7 per cent and 1.6 per cent previously," it said. Moody's said the Brexit impact on US growth should be minimal. "The direct trade exposure of the US economy is limited, with exports to the UK accounting for only 4 per cent and 0.4 per cent of its GDP. We maintain our expectations for US real GDP growth of 2.0 per cent for 2016 and 2.3 per cent for 2017."

"Downside risks to global growth stem not from the possibility of a recession in the UK, but from the possibility that developments in the UK may give rise to increased political risk elsewhere in the EU," it said.

In the report 'Global Macro Outlook Update: EU Political Contagion Represents the Greatest Risk to Otherwise Muted Global Impact from Brexit', Moody's said its size makes the EU systemically important to the world economy and the US. The materialization of negative risks in the EU would, therefore, have significant consequences for global trade and growth.

Since the vote, global equity indices have mostly recovered from their post-Brexit lows, corporate spreads have tightened and capital flows to emerging markets have remained stable.

"However, there are also notable signs of elevated investor risk aversion and flight to quality. The pound has weakened to a 30-year low, falling as much as 13 per cent against the US dollar, and sovereign bond yields associated with safe haven currencies, such as the dollar and the yen, have fallen to record lows," it added.

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