Economists at major City investment banks have cancelled forecasts of a Brexit-inspired recession amid fresh data showing the economy performing more robustly than expected. Britain’s trade deficit narrowed significantly in July, as exports increased by £800m to £28.4bn, while imports fell by £300m to £36.6bn. Construction output was also steady in July, faring better than expected a month after the Brexit vote.

Goldman Sachs, Morgan Stanley and Credit Suisse are among the major banks that have now withdrawn earlier predictions that Britain is likely to enter recession.

Construction and export figures fuel hopes UK economy is growing Read more

Credit Suisse had been among the most bearish immediately after the EU referendum result, forecasting a 1% contraction in the UK economy in 2017. However, in a note entitled “Bouncing back from Brexit”, its economists now reckon the UK economy will expand by 0.5% next year.



“The negative impact of the UK’s vote to leave the EU on growth appears to have been materially less than we expected in late June … Resumed political stability, a weaker currency and the Bank of England’s policy response look to have stabilised activity ... that may be sufficient for GDP to avoid a modest contraction.”

Other major banks had forecast a “technical recession” with GDP possibly going negative for two quarters later this year or next. Morgan Stanley initially forecast the economy going negative by 0.4% in the third quarter of 2016, but this week changed that to expectations of 0.3% growth. It said: “We’ve ‘marked-to-market’ our growth forecast from a sharp slowdown and Brecession, to a lesser slowdown, which narrowly avoids a technical recession.”

In the days after the vote, Goldman Sachs slashed its growth forecast for the UK by 2.5% over two years. Its chief European economist, Huw Pill, said on 27 June that there would be “a steep fall in activity” as he predicted a “mild recession by early 2017”.

Pill said this week: “The downturn in the UK – while still substantial – is likely to be shallower than we thought in the immediate aftermath of the referendum.” Goldman Sachs is now pencilling in UK growth of 0.9% in 2017.

One forecasting house, Oxford Economics, which maintains a “recession watch” barometer, on Friday lowered the chances of a UK recession from 30% to 25%.

Prominent vote leave campaigner, Ukip’s only MP Douglas Carswell, said the U-turn in recession forecasts showed how far bankers are “marinaded in groupthink”. “Having hyped up the dangers of Brexit, a lot of the banks today look pretty stupid – almost as stupid as they were before the financial crisis, when they were convinced that the bubble would last. If only their bonuses were related to the accuracy of their forecasts.”

However, some economists are standing firm on their forecasts about the possibility of a Brexit-inspired recession, continuing to predict a significant slowdown in the UK economy in 2017, with article 50 yet to be triggered, and businesses deeply cautious about investing while negotiations over Britain’s exit from the EU continue.

The National Institute of Economic and Social Research said: “For the year to date, economic growth in the UK has been subdued compared with recent history, and the economy has been flat since April. Given this, the probability of a technical recession before the end of 2017 remains significantly elevated.”

Among the more bearish of City commentators is Pantheon Macroeconomics. In a note to clients earlier this week, its chief UK economist, Samuel Tombs, said the “weak July industrial production figures keep the risk of a contraction in Q3 GDP alive”.

He expects industrial production to decline in August and September, leave production 0.3% lower in Q3 than Q2. He added that the better trade data “is emphatically not a sign that sterling’s depreciation already is having beneficial effects … as it takes time for firms to renegotiate contacts and exporters to invest in new capacity. In addition, multinational companies have warned vocally that they will hold back from investing and relocating production to the UK.”