Brexit: What (or who) is Next-it? - RBS

Research Team at RBS, believes the ramifications from the recent UK leave vote for the Eurozone and broader European economies are negative.

Key Quotes

“We have lowered our Eurozone GDP forecast to 1.4% for 2016 (from 1.5%) and to 1.0% for 2017 (from 1.3%). The key concerns are heightened uncertainty about the future political and economic landscape in Europe and the impact of this on business and consumer confidence.

A weaker pace of domestic growth will further complicate the ECB’s efforts to bring inflation back toward its target. Although we have left our average HICP inflation forecast for 2016 unchanged (at 0.2%) we have reduced our inflation forecast for 2017 to 0.6% (from 0.9%). We note here that market-based inflation expectations have dropped sharply in recent days.

We have previously been forecasting that the ECB would cut its deposit rate by 10bps and upscale its asset purchase programme by €20-25 billion at its meeting on 8th September. And last week’s UK leave vote reinforces our view. There is some risk that further easing will be enacted at the next ECB meeting on 21st July though this is not yet our base case.

And contagion? Is the candle of secession near the drapes? 2011/12-style financial contagion is not a model that will serve us well in anticipating political risks. Scandinavia is the region we judge to be most susceptible to the ‘leave’ meme. In the Euro Area the Netherlands, and perhaps Austria deserve more investor attention.”