Economic Outlook – 26 June 2016


The housing market is on solid ground heading into the busy summer selling season, according to home sales data released this week. Data still supports the common expectation that housing will remain a bright spot for the US economy in 2016.

Durable goods orders point to continued weakness in business investment this year. The factory sector had been slowly making its way out of the woods as headwinds from sluggish global demand, the surge in the US dollar and weak corporate profits began to wane. Now they face the fallout from the UK referendum.

In her semiannual testimony to the US Congress mid-week, Chair Yellen noted the potential for “significant economic repercussions” of such an outcome that could “usher in a period of uncertainty” and negatively affect US economic activity, with the Fed likely to monitor global developments closely. Given the implications for slower US growth and lower inflation, on account of the fallout, the expectation is the Fed will stay pat through the rest of the year.

Brexit very probably takes a potential US rate hike in September off the table, so the focus on economic data will be less. PMI and consumer confidence data for June are due, but the most important figure will be for employment, which is not due until 8 July instead of the usual first Friday in the month.


The historic vote to leave the European Union is now likely to be followed by a long process of negotiating the exit and the new relationship. Within the Conservative party speculation over a change of leadership will probably now mount. With Scotland’s electorate having expressed a desire to remain in the EU there is a possibility for calls for a second Scottish independence referendum.

Uncertainty over the future UK-EU relationship and the UK political outlook will weigh on the economy. The expectation is for it to stagnate over the next two to three quarters. Overall, the level of GDP in 2018 could be almost 2% lower than previously forecasted.

Sterling is expected to weaken which will put upward pressure on inflation. The Bank of England (BoE) is likely to respond to the recession by easing monetary policy. The BoE has communicated it prefers to lower the bank rate before using other tools, but it is possible they will need to do both eventually The expectation is for a rate cut from 0.50% to 0.00% and an expansion of the Asset Purchase Facility by GBP 150 to GBP 200 billion. A negative bank rate has been ruled out by BoE Governor Mark Carney due to concerns over bank profitability.

Since the UK economy will bear the brunt of most of the direct effects of Brexit, investment spending in the UK is likely to take a major hit due to uncertainty. A modest recession in the UK cannot be ruled out at this point for H2 2016. In 2017, the growth outlook depends on how the withdrawal negotiations are progressing.


From the perspective of international markets, they could recover again in the medium term, since an amicable divorce with a continued British membership in the single market is the more likely scenario. Nor will the EU emerge unscathed, because Brexit will encourage parties across the continent which are critical of the EU.

Anti-EU nationalist parties in many European countries have been emboldened by the Brexit vote and are now calling for their own referenda. Most of these nationalist parties are on the political fringe, and a wave of EU referenda anytime soon on the continent is not to be expected. However, the EU bureaucracy is not warmly embraced in most European countries, and the idea of exiting the EU could fall on fertile political ground there.


May property prices have witnessed some early signals of softness. As both housing investment and sales moderated in May, a closer inspection is justified.

Recently, China launched a so called Macro Prudential Assessment (MPA) framework in Shanghai since Q1, which could have a significant impact on China’s property market over the medium to long term. It seems that the market might have underestimated the impact of this new framework.


Sources: Danske Bank, Commerzbank, Haendelsbank, TD Economics, Wells Fargo, BNP Paribas.