In turbulent times, investors like to joke that there is never just one cockroach. Early this week, Standard Life suspended redemptions on its UK Real Estate Fund. A day later, Aviva froze redemptions on its UK Property Trust and M&G did the same on its Property Portfolio. The news has focused attention on the UK commercial property market, which investors fear will become less appealing with Britain outside the European Union. There were already signs the market was slowing before the referendum: the Purchasing Managers’ index (PMI) tracking construction slipped to its lowest level since 2009.
These signs of financial stress sent the pound to a new 31-year low against the dollar, while stocks wobbled again. The renewed volatility was a disappointment, since last week it looked as though markets might have got through the worst of their post-Brexit jitters. The FTSE 100 had rebounded to an 11-month high and the FTSE 250, a better reflection of the UK economy, recovered half its losses. But now the outlook looks more uncertain.
How bad could all this get? Economists have reduced their growth forecasts significantly. A survey by Consensus Economics shows that the average forecast for GDP growth in 2016 is 1.4%, down from 1.9% before the vote.For next year the respective figures are 0.4% and 2.1%. The implication, says David Smith in The Sunday Times, is that they expect a recession – two successive quarters of negative growth – between now and next summer.
The signs aren’t very encouraging, with the PMI survey of the services sector (80% of GDP) showing the weakest activity since early 2013. And most of the survey was taken before the vote.
Meanwhile, the lack of clarity over a future deal with the EU is hampering business investment. Still, as Capital Economics notes, we could avoid recession. If the outlook darkens, the Bank of England is likely to cut interest rates or restart quantitative easing (QE). The Bank’s governor, Mark Carney, has already tried to boost confidence by telling banks they could stop building up a rainy-day capital buffer, implying potential fresh lending of £150bn.
Meanwhile, the weak pound will shore up growth and the government has ditched its fiscal target. Whatever impact more QE has on growth, extra liquidity bodes well for asset markets. If there are further global wobbles, central banks elsewhere could loosen too, or reach for new tools. The upshot is that due to Brexit, says The Wall Street Journal’s Richard Barley, the global “exit from emergency monetary policy has never looked further off”.