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Equities struggle as research shows UK to be worse off under all Brexit scenarios

Economic headlines this week were dominated by official forecasts from the Treasury and the Bank of England about the negative impacts that any form of Brexit will have on the economy.

The Bank of England’s study said that a no-deal Brexit would cause the worst recession since the Great Depression, with a 30% fall in house prices, interest rates rising to 5.5% and an overall hit to the economy of 8%.

Ben Broadbent, one of the Bank’s deputy governors, said that this would be worse than any crisis since “we went back on gold” and the economy subsequently crashed in 1930. In the 2008 financial crisis the UK economy contracted by 6.3 per cent. The Bank’s assessment came just after the Treasury produced its own report which showed that Britain’s economy would take a 3.9% hit in 15 years’ time compared to if it had remained in the EU. The Treasury also concluded that there was virtually no value in the UK having an independent trade policy – something that pro-Brexit MPs had argued was one of the biggest “benefits” of leaving the EU.

Under the worst-case, no-deal scenario, GDP would be 10.7% lower in 15 years’ time than if we had stayed in the EU.

Retail sales increased in November thanks to seasonal sales, but the outlook remains weak, according to a survey by the Confederation of British Industry (CBI). Its Distributive Trades Survey for November showed that 36% of respondents reported sales volumes were up in the year to November, while 17% said they were down, giving a net balance of +19%, above most analysts’ forecasts of +10%. Investment intentions for the next 12 months, compared with the last 12 months to November, were -3%. In a downbeat summary, Anna Leach of the CBI, said: “Business sentiment remains poor, investment intentions are flat and headcount continues to decline.”

The key UK services sector saw profitability in the past three months, and optimism about the coming year, both falling sharply, according to the latest CBI sector services survey. Optimism about general professional services fell by -18%, the fastest pace for two years.

The rate of growth in new consumer credit fell to its lowest level for three years during October, according to Bank of England data released on Thursday. The news has implications for the level of consumer demand in the coming months as credit powers so many of our purchases. British consumers borrowed 7.5 per cent more than a year earlier, down from 10.9 per cent in November 2016, representing the slowest rate of annual growth since May 2015. The news tallies with the latest GfK consumer sentiment index, which fell to -13 in November from -10 in October, revealing signs that the economy is slowing. All the components in the widely-respected survey fell, including major purchase intentions. Consumers' confidence in the economy over the next 12 months was the worst since the global financial crisis.

UK house price growth edged up in November from October’s low reading, but the outlook remains downbeat because of the uncertain economic horizon and a squeeze on household finances. According to the Nationwide House price index, the rate of house-price growth rose to 1.9 percent in November from 1.6 per cent in October.

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Important Notes:

Main source of information: Company Report and Accounts, Bloomberg

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