How likely is a UK recession after Brexit?

In the wake of the UK Brexit vote, forecasters have rushed to downgrade their growth forecasts for the UK, with some now expecting a recession. Using the Oxford Economics' Global Economic Model, we examine how likely a recession is by looking at the shocks the UK economy faces and the policy responses. We conclude that while a sharp slowdown is likely – in line with our own new forecasts – a recession is unlikely. Many UK forecasters are now predicting a recession in 2017, even though ‘stand‐alone’ recessions in industrial countries are rare. Our forecast is less downbeat. The UK faces a series of negative shocks including to consumers and business confidence, but growth will be supported by the weaker sterling and likely policy responses. Using the Oxford Economics' Global Economic Model, we show that to shift our baseline forecast of growth of 1.1% next year to zero would require a very severe negative confidence shock. Our new baseline already assumes a shock equivalent to one‐third of that seen in the global financial crisis (GFC). All else being equal, the shock would have to be around two‐thirds of that in the GFC to cut GDP growth to zero in 2017. Our new baseline also does not incorporate all the possible policy levers the UK can employ. We currently assume the Bank Rate drops to zero, but if a ‘rescue package’ of £75 billion of QE and a fiscal stimulus equal to 1% of GDP was also added, then the shock to confidence needed to get zero GDP growth would have to be similar to that seen in the GFC. We do not consider this likely given the scale of financial stress and credit restriction that occurred globally at the time of the GFC.