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Post-Brexit UK economy set to shrink for the first time in 4 years: Economists

The U.K. economy is likely to shrink in the three months following the Brexit vote, marking the first quarterly contraction in almost four years, according to Britain's oldest independent think-tank.

Following the U.K.'s vote to leave the European Union in June, the economy is seen falling by 0.2 percent in the third quarter, with the risk of further decline into recession, the National Institute of Economic and Social Research (NIESR) said on Wednesday.

Pedestrians walk in the rain at the Canary Wharf business district in London.
Eddie Keogh | Reuters

"We are expecting a marked slowdown in the U.K. economy," Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, told journalists at a media briefing on Tuesday.

He put a 50 percent probability on a technical recession — when the economy shrinks by two or more consecutive quarters — in the next 18 months.

This NIESR prediction follows on from Goldman Sachs, whose economists forecast a "mild" recession in the U.K. by early 2017. The International Monetary Fund (IMF) has also warned of a possible recession, although that is not the global body's base-case scenario.

"I don't think any of us are talking about a recession on the scale of that (U.K. downturn in 2008-09 after the global financial crisis)," Kirby said.

The downbeat forecast may put further pressure on the Bank of England to act after its two-day policy meeting that starts on Wednesday.

NIESR sees the bank cutting its base rate by 25 basis points after this meeting and making a further 15 basis point-cut in November. This would take the Bank of England rate from its current all-time low of 0.5 percent to 0.1 percent.

It added that the bank might also reintroduce quantitative easing.

Chris Ratcliffe | Bloomberg | Getty Images

In the second quarter this year, the U.K. grew by a better-than-forecast 0.6 percent, according to the first official estimate out since the Brexit vote. The figure, from the Office for National Statistics, was based on data from the three months ending June 30, with the referendum taking place on June 23.

"Uncertainty will persist over the next couple of quarters rather than decay … The decline in business investment is expected to continue into the second half of the year and into 2017," Kirby said.

Like the IMF, NIESR forecast the U.K. economy would grow by 1.7 percent for 2016 as a whole. The U.K. institute is more negative about 2017, seeing 1.0 percent growth, rather than the 1.3 percent expected by the IMF.

It also cuts its growth forecast for the euro area to 1.3 percent from 1.7 percent.

The institute also warned that greater "balkanisation" of the European Union and its financial industry would put pressure on Europe's biggest banks — some of which remain fragile, particularly in Italy.

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