Richard Batley, an economist at Lombard Street Research, is now predicting that the UK will tip into recession in the second half of this year as a result of Brexit.
He points out that the UK economy was looking fragile before the shock result, with business investment slowing in the second half of 2015 and the first half of 2016. He believes that the slowdown resulted from the uncertainty that followed the General Election as to when a referendum would be held and what deal Cameron would be able to negotiate ahead of it. He speculates that a vote to remain would have resulted in a spurt of investment, but that this will now be held back by the further uncertainty that now faces the UK post the Brexit vote.
A weak Sterling is needed to assist economic recovery
Batley now expects business investment in the UK to fall by 2 per cent in 2016 and 5 per cent in 2017. However, he expects sterling to remain weak for a prolonged period, which should help exporters and may encourage on-shoring of manufacturing. If economic growth is negative in the second half of this year, the economy will technically be in recession, but, as this will not be accompanied by recessionary conditions in our main export markets, Batley argues that the recession should be short-lived. However, he believes that sterling needs to remain weak to assist with economic recovery and he is concerned that there are risks to the euro, which might lead to sterling strength. The likely response from the Bank of England would be to reduce interest rates, although there is not much scope for this given that rates are already very low.
Money&Co. has the data to apply "stress tests" to borrowers
How would a recession in the second half of 2016 affect Money&Co.? Any economic weakness is likely to result in pressure on profits for UK companies. However, when we are assessing potential borrowers, we always look at their past trading history carefully to see how they coped in previous downturns. The average trading history of our borrowers is 14 years and so this gives us sufficient data to do this. In addition, we look at profit projections and create negative scenarios to see what impact these would have on profitability and the ability of the borrower to make repayments. By applying "stress tests", we gain comfort that the borrower should be able to repay even if the economy turns down.
There is no doubt that the unexpected vote to leave in the referendum will cause economic weakness in the UK. However, we think that the Money&Co. loan portfolio will perform well in a weaker environment and we believe that we will still be able to find attractive new loans to offer to our lenders.