REPORT
By Gökhan Kurtaran
London letter for week beginning May 16

“Uncertainty clouds over economic outlook”

There are almost six weeks to go for the EU referendum which will decide whether the U.K.’ future lies in staying or leaving the European Union. Uncertainty continues to weigh on the markets from its growth and in services, retail, construction, inflation and purchasing managers indexes.

Last week, the Managing Director of the IMF, Christine Lagarde, backed the Bank of England governor Mark Carney’s claim that Britain could enter a recession if the decision to leave the EU prevails. Once the fastest growing economy within the G7 countries, it has only been a year since talks of the risk of a recession emerged.

The changing tone of key decision makers in the British economy reflects the mounting worries of investors. Lagarde, who was in London on Friday to present the fund’s annual health check on the U.K. economy, said it was possible the economy would shrink in two consecutive quarters, which is the definition of a recession.

“We have looked at all the scenarios. We have done our homework and we haven’t found anything positive to say about a Brexit vote,” Lagarde warned.

Moreover, according to IMF, panic among investors would trigger shockwaves throughout the economy following a vote to leave, sending shares and property prices into a downward spiral. 

Carney, governor of the Bank of England, defended his warnings of the “recession” last week in an interview with Andrew Marr of the BBC on Sunday.

He said he was independent of politics and was not suggesting how people should vote. However Carney said the bank’s role was to "identify risks, not to cross your fingers and hope risks would go away."

The U.K.'s inflation rate, as measured by the Consumer Prices Index, fell to 0.3 percent in April. The fall, from March's rate of 0.5 percent, is the first since September.

"Fall in air fares and prices of clothing, vehicles and social housing rent" were the main reasons for the drop in the rate, the Office for National Statistics (ONS) said. The Bank of England's Monetary Policy Committee (MPC) voted last week to keep interest rates unchanged at a record low of 0.5 percent. The Bank is not expected to raise rates until at least next year.

The current poll of polls of the Financial Times is still to close to call. Almost 46 percent backs remaining in the EU while 44 percent backs a Brexit.

17 May,2016

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