Brexit increases 'stagflation' risk: Pimco

Brexit increases 'stagflation' risk: Pimco

The decision by UK voters to leave the European Union has increased the likelihood of a low-growth/high-inflation ('stagflation') scenario over the medium term, says Pimco.


In a note to investors titled From Brexit to Stagflation, Pimco global economic adviser Joachim Fels said investors face a “higher chance of stagflationary outcomes” over the next three to five years.

“This would likely come to pass if current or future governments turn more protectionist by erecting barriers to trade and migration, and take up or intensify the battle against inequality by redistributing income from capital to labour,” he said.

The UK’s decision to leave the European Union last week has already had severe consequences for both UK and global markets, with the pound reaching a 30-year record low.

The ASX lost 3.2 per cent on Friday as news of the referendum outcome was known, and AMP Capital’s head of fundamental equities Michael Price noted that the financial and resources sectors were being hit hardest.

Mr Price added that whether investors treat Australia as a safe-haven or a vulnerable economy is yet to be seen, with lower growth and bond yields likely to result in resurgent yield trading.

“The Australian market has rallied for three years without earnings growth and could be considered expensive and vulnerable to a loss of global confidence,” he said.

In the UK, according to JP Morgan, growth will continue to slow down, with a reduction in annualised pace from 1.6 per cent to 0.6 per cent in the second half of 2016.

JP Morgan chief market strategist for the UK, Stephanie Flanders, said inflation is likely to jump to 3.0 or 4.0 per cent by the end of 2017, a significant increase on previous forecasts of 1.7 per cent.

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