\nreinforce a recent loss of momentum in parts of the UK economy.
\nWe believe the result of the referendum will hit consumer and
\nbusiness confidence, at least in the short term. Business
\ninvestment, already fragile, will be hurt, and so will credit
\ngrowth. Capital outflows are to be envisaged; the UK\u2019s current
\naccount balance will be hurt, as will government finances. As a
\nconsequence, our baseline scenario is for real UK GDP growth of
\nthe order of 1.3% this year and 0.9% in 2017, well below our
\nexpectation earlier this year that UK GDP would grow by 1.8% in
\n2016 and by 2.0% in 2017. In addition, a sharp drop in sterling can
\nbe expected to lead to a rise in imported inflation that will offset
\nany weakness in domestic inflation, at least in the short term.
\n
![\"brexit_-_changes_in_pictet_s_baseline_scenario_for.jpg\"](\"http:\/\/www.next-finance.net\/http:\/\/beta.next-finance.net\/wp-content\/uploads\/2016\/06\/brexit_-_changes_in_pictet_s_baseline_scenario_for.jpg\")
<\/a>\nWe now believe real growth in the euro area could be 1.5% this
\nyear instead of the 1.8% rate we had been forecasting. And we
\nexpect the euro area economy to expand by 1.3% rather than 1.7%
\nin 2017. But given that the UK only accounts for 2% of the world
\neconomy (on the basis of purchasing power parity), we believe
\nthe Brexit vote will have only a slight impact globally. Our
\ncentral scenario now is that world growth will be of the order of
\n3% this year and next, instead of 3.2%. Central banks will likely
\ntake coordinated action to avoid a liquidity crisis.<\/p>\n
Markets.<\/strong> Given our analysis that financial markets had never We expect a steepening in the yield curve on UK gilts in the short Politics.<\/strong> The political impact of the vote for Brexit will be The result has led David Cameron to announce his resignation as
\nfully priced in Brexit, and given the rebound seen in the days
\nrunning up to the referendum, we believe that volatility will rise
\nsignificantly despite central banks\u2019 interventions and that risk
\nassets will come under pressure in the days that come. We also
\nbelieve that after the shock has passed, risk assets will stabilise
\nwhile market participants tease out the form that Brexit takes. But
\nthis stabilisation could prove temporary and give way to
\nrenewed market pressures.
\n<\/a>
\nOur central forecast foresees a short-term drop of 12-15% in UK
\nequities from their current levels. We also believe that the fall-out
\nfrom Brexit will be felt in euro area equity markets, with the Euro
\nStoxx 50 sliding by 7-10% in the short term. By contrast, we
\nbelieve US equities will remain relatively (but not totally)
\nimmune from the Brexit vote. We expect a number of \u2018safe haven\u2019
\nassets to be boosted by the UK referendum result in the short term, including the Swiss franc, the US dollar, Japanese yen, gold
\nand core government bonds. Having risen close to GBP1:USD1.50
\nby referendum day from less than GBP1:USD1.39 at the end of
\nFebruary, we believe the shock caused by the Brexit vote will
\ncause sterling to drop sharply again before stabilising in a range
\nof GBP1:USD1.25\u2014USD1.35. The Swiss franc will also come
\nunder renewed upward pressure, forcing the Swiss National
\nBank to intervene in an effort to stop the Swiss franc from rising
\nbeyond \u20ac1:CHF1.08.<\/p>\n
\nterm before action by the Bank of England (BOE) leads to curve
\nflattening. Expectations that the BOE would gradually move to
\nnormalise policy will need to be put on hold. We also foresee a
\nrenewed decline in US Treasury yields, with 10-year US Treasury
\nyields perhaps falling by 20-30 basis points from their current
\nlevels. We expect a slight fall in German Bund yields (perhaps by
\n10 basis points) to be accompanied by a rise in yields on
\nperipheral euro area bonds before possible intervention by the
\nEuropean Central Bank steadies the fixed-income market. Similar
\ntrends are to be expected in European corporate bonds.<\/p>\n
\nsignificant, but the UK and Europe have time to negotiate the
\nmechanics of the UK\u2019s exit from the EU. Article 50 of the
\nEuropean Treaty establishes a two-year negotiating period.
\nDuring this time, the UK parliament will have its say, with
\nresults that cannot yet be foretold. There could be a \u201chard\u201d exit
\n(with no preferential access for UK exports to the EU) or a \u201csoft\u201d
\none (with some preferential access in return for notable
\nconcessions, in line with Norway\u2019s relationship to the EU). We
\nbelieve the UK could lose around 4% of potential GDP growth in
\nthe next five years if we see a \u201csoft\u201d exit, but that the UK could
\nfall into recession in the short term and lose a cumulative 8% of
\npotential GDP growth over five years should there be a \u201chard\u201d
\nexit. <\/p>\n
\nBritish prime minister. More fundamentally, we believe the
\nreferendum result provides a second wind to populism (and the
\ntenants of economic protectionism) throughout the western
\nworld. We believe this populism will remain centre-stage in
\nEuropean politics for some time, increasing uncertainty and
\nmaking life uncomfortable for mainstream policy makers. The
\nfuture of the European economic union is at risk.
\n<\/a>\n\t\t\t<\/div><\/figure>