UK likely to avoid Brexit-recession following slight economic rebound, says Danske Bank

The United Kingdom is expected to avoid a post-Brexit recession after soft economic indicators suggest that the economy has rebounded in August after the initial deceleration in July. As the economic data have been better than expected, it is now expected that the quarterly growth in gross domestic product will stay positive during the second half of this year.

Despite better data, a further easing late this year by the Bank of England (BoE) cannot be ruled out, as the BoE has indicated that it will cut rates if its growth forecast (0.0-0.1 percent q/q in Q3) materializes. The BoE is expected to stay on hold at its upcoming meeting on Thursday but will read the minutes carefully for any changes to its easing bias.

However, a 15 basis points cut from 0.25 percent to 0.10 percent is expected in November, but it is a very close call. All three PMIs have rebounded significantly in August after sharp falls in July. Further, NIESR GDP indicator has also been better than expected. Overall, PMIs and the NIESR GDP estimate suggest a slower but still positive GDP growth in Q3, Danske Bank reported in its research note Wednesday.

Moreover, the economy has rebounded due to BoE easing, less political uncertainty after the crowning of Theresa May as PM and no triggering of Article 50. Although consumer confidence rebounded slightly in August after an initial drop, it is still lower than before the referendum. However, consumers still remain significantly quite optimistic above the levels witnessed during 2008- 2013.

In contrast, the housing market remains a risk factor. A severe housing market slowdown could lead to lower private consumption growth and hence hurt overall economic growth. However, overall, the indicators still suggest a slower house price growth and sales activity, not only due to Brexit, but also due to the higher stamp duty tax implemented in April.

"We stress that uncertainty surrounding our forecasts is higher than usual as the Brexit withdrawal negotiations are set to begin early next year. We expect EUR/GBP to continue to trade higher in the coming months due to more BoE easing, political uncertainty and considerable imbalances in the economy," the bank commented in its research report.