OREANDA-NEWS. There is little doubt that the UK referendum vote in favour of leaving the EU will take a significant toll on the economy, Fitch Ratings says. Businesses are facing a surge in uncertainty on three separate fronts - the future of the UK's trading relationship with the EU, the shape of the regulatory framework, and domestic political uncertainty, including the future status of Scotland. This uncertainty will prompt firms to delay investment and hiring decisions, while elevated financial market volatility will further damage business confidence.

We expect investment to fall by 5% in 2017 and by 2018 for it to be 15% lower than previously expected in Fitch's May 2016 Global Economic Outlook (GEO). Consumption will not be immune to this shock and overall spending by UK residents will see a mild decline in 2017. The sharp fall in the value of sterling will provide some offset to the demand shock, with exports likely to benefit somewhat in the near term. Imports look likely to decline as investment contracts and foreign products become more expensive, resulting in expenditure switching to domestically produced goods and services and higher inflation. UK GDP growth is expected to fall to around 1% in both 2017 and 2018. This is a downward revision of 1 percentage point in each year from the May 2016 GEO.

The long-term impacts of Brexit on the economy are harder to estimate with great precision. However, in addition to less favourable access to the European Single Market, reductions in trade openness and inward FDI could harm productivity performance, while reduced immigration would slow labour supply and potential GDP. These negatives will likely outweigh any GDP gains from deregulation outside the EU or the redirection of EU budget transfers.

Brexit hits the world economy at a fragile juncture, with US growth recently weighed down by external shocks, but the direct near-term impact on the global economy is likely to be manageable. The trade exposures of US and Asian economies to the UK economy are small. The eurozone will suffer a larger shock from weaker UK demand and the depreciation of the pound, but for the block as a whole, growth adjustments will likely be significantly smaller than for the UK. Global financial market contagion beyond the UK has not been particularly severe since the vote, although European bank shares have fallen sharply as concerns about profitability have risen. Liquidity provision and monetary policy adjustments by global central banks should be able to contain the risk of a significant and widespread tightening in global credit conditions, although a further strengthening of the dollar - with implications for emerging market currencies and debt service - cannot be ruled out. Further Fed tightening is now likely to be delayed until December 2016 and the ECB is expected to persist with asset purchases beyond March 2017. The Bank of England is likely to lower interest rates to 25 bps later this year.

Nevertheless, medium to long-term risks to the global economy from the Brexit vote would rise in the event of increased political fragmentation pressures in the rest of the EU or a reversal of globalisation that culminated in rising trade protectionism.