Goldman Sachs forecasts UK recession in 2017

The U.K. is likely to enter a "mild recession" by early 2017, following its vote leave the European Union (EU), Goldman Sachs economists wrote in a report released Sunday.

The bank's economists also downgraded its global growth forecast by 0.1 percentage point to 3.1 percent in 2016.

U.K. gross domestic product (GDP) would take a 2.75 percentage-point hit in the next 18 months from the cumulative effects of "increased uncertainty and deteriorating terms of trade," Goldman Sachs' Jan Hatzius, Jari Stehn and Karen Reichgott wrote.

Goldman's forecast for GDP growth in the U.K. this year was 1.5 percent, a 0.5 percentage-point drop from its previous forecast, while the bank's prediction for U.K. growth next year is 0.2 percent, a 1.8 percent decline from its previous forecast.

The economists listed three "economic transmission mechanisms" from the shock Brexit vote.

"First, the UK terms of trade are likely to deteriorate, especially if it becomes harder to export high-value added services (including financial services) to the European Union," the note said.

"Second, the uncertainty about the long term is likely to weigh on UK growth in the short term as firms hold off on investment...Third, outside the UK the main transmission channels are weaker UK demand for imports and—much more importantly—a tightening of financial conditions via a stronger exchange rate and lower risk asset prices."

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