July 2016

Brexit: Populists 1 Economists 0 (page 2)

•In voting to leave the European Union on 23 June the UK may have shot itself in the foot, but at just over 4% of global GDP it is not significant enough to derail the world economy. Easier monetary policy will also help soften the blow and global growth is only a tad lower on our revised projection.
•However, such a conclusion ignores the increase in tail risks following the UK’s decision. Political risk on UK assets has clearly risen as reflected in the fall in the pound, but the UK experience could be repeated elsewhere as populist sentiment fuelled by inequality increases.

UK: Stagflation looms as Brexit reality sets in (page 6)

•The risk scenario is now the reality. The UK is preparing to leave the EU but must first find new leadership. Risk assets have reacted negatively, with domestic UK stocks coming under pressure.
•We are downgrading UK growth substantially, although a recession should narrowly be avoided. Inflation is being revised up as sterling slides. The Bank of England is likely to cut interest rates, while fiscal support should also follow. The Eurozone forecast has also been adjusted, albeit not to the same degree as the UK numbers.

EM and Brexit: should we worry? (page 13)

•Despite a market wobble, Brexit is not a major risk for EM. Direct links with the UK are limited, with some exposures via trade, bank claims, and remittances. A wider European crisis would be an issue for a larger part of EM, but this is not our base case.
•CEEMEA economies are most at risk while Asia and particularly Latin America looks insulated. Where concerns build for the latter would be in tail risk scenarios, prompting tighter global liquidity which hurts those economies more reliant on overseas financing.

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