S&P slices euro zone and UK growth forecasts after Brexit vote

Euro zone economic growth will take a knock in 2017 and 2018 because of the U.K.'s vote to leave the European Union (EU), S&P Global Ratings said on Monday.

"For the euro zone, despite the increased uncertainties and the hit to foreign demand resulting from Brexit, we do not at this point expect the recovery to stall. However, we estimate the Brexit effect will cost the euro zone 0.8 percent of GDP (gross domestic product) over 2017 and 2018," the ratings agency said in a report.

Brexit: Week that shook the world

The U.K. voted to leave the EU in a referendum at the end of last month. The news rocked global financial markets, which had priced in a victory for remain.

S&P forecast Brexit would knock U.K. GDP by 1.2 percent next year and 1.0 percent in 2018, predicting weaker investment prospects, both domestically and for foreign direct investment.

"These new estimates assume that access to the single market is maintained in 2017 and 2018 and that the Bank of England succeeds in keeping turmoil in financial markets in check," it said.

The agency forecasts the Bank of England would slash interest rates to zero from 0.5 percent by the end of this year and would restart quantitative easing in 2017.

"We think the U.K. will barely escape a full-fledged recession caused by Brexit, but the downside risks are numerous," S&P said.

UK Gilts

U.K. Government Bonds (GILT)

Last week, Bank of England Governor Mark Carney predicted a "material slowing" in growth as a result of the Brexit vote and said policy easing would likely be required over the summer.

Sterling hit a 31-year low against the U.S. dollar after the referendum and remains sharply lower than before the vote.

S&P said the weaker pound would help trade in 2017 and 2018 but also stir up inflation. It forecast that U.K. housing prices would decline in 2017 and remain flat in 2018.

"If negotiations between the U.K. and EU become confrontational, the confidence effect on the housing market could be more severe," it said.

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