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Experts agree: When the dust settles, there will be a clear main victim of Brexit

Rayhanul Ibrahim
Downgrade. (Image: Wikimedia Commons)

"When the dust settles ... it won’t be pretty," Bank of America Merrill Lynch UK economist Robert Wood said. "Once the dust of the knee-jerk market reaction settles, we think that the UK's economy will clearly be the main victim."

Woods' blunt message reflects the consensus among top economists.

"The economy will turn down quickly," Wood said in a research note titled "Hello recession."

This follows Britain's vote to leave the European Union. Britsh financial markets have been under tremendous pressure with stocks tanking and the pound getting crushed. And analysts warn that the damage may just be beginning. This isn’t too surprising; analyst notes from before the referendum indicated that the UK economy would be hurt by a Brexit vote.

What is jarring is how strongly Wall Street's economists are convinced that this outcome will severely hurt Britain’s economy. And their colorful and brutally candid language reflects how confident they are in their assessment, which can be seen from the quotes below:

"While the actual path to exit is not yet clear, there are nonetheless profound implications for the UK. We expect a recession in the second half of the year and policy easing from the Bank of England." -Credit Suisse.

"A technical recession in the UK may now be a given, followed by a period of very slow growth in a period of heightened risk and uncertainty as the UK moves to exit." - Jefferies.

"Increased uncertainty and deteriorating terms of trade are likely to subtract a cumulative 2 3⁄4% from UK GDP, and we now expect the economy to enter a mild recession by early 2017." Goldman Sachs.

"We expect at a minimum a minor recession in the UK and significant slowing of euro area growth in the year ahead." -Barclays.

"A modest recession in the UK seems increasingly likely. " - Wells Fargo.

"We see the odds of a UK recession within the next 12 months now as 60% " -TD.

“A significant negative uncertainty shock” - UBS.

"Out into the unknown" - Morgan Stanley

S&P and Fitch have even stripped the UK of its perfect AAA credit rating. Both agencies cited fallout from the Brexit vote.

Clearly, there is no doubt about it on Wall Street: the British economy is going to be hit hard by Brexit, and the worst is still yet to come.

Currently just $1.33 will get you one British pound, which compares to $1.50 just before the referendum. Now is not the time to buy the currency though. Bank of America Merrill Lynch analysts warn that the pound still has more room to fall.

“For now, this may not be the time to 'catch a falling knife,'" BAML analysts said. "In our scenario analysis before the referendum, we had argued that GBP/USD could weaken by as much as 10% almost immediately in case of Brexit, falling even more in the medium-term, potentially all the way down to $1.25.”    

BAML does believe that the damage can be blunted by central banks and policy makers moving quickly, as that will help eliminate uncertainty. Even with quick actions though, BAML analysts see the UK dipping into a recession, and have cut their annual GDP growth expectation for 2017 from 2.3% to just 0.2%.

Unfortunately, uncertainty may linger. Prime Minister David Cameron does not seem to be in any sort of rush to move things along, given that he has stated that “A negotiation with the European Union will need to begin under a new prime minister and I think it is right that this new prime minister take the decision about when to trigger article 50 and start the formal and legal process of leaving the EU.”

Cameron is not leaving office until October. Stretching out the process of leaving the EU until then will just increase uncertainty, hurting the British economy.

All eyes will be on the UK, as the short-term effects of Brexit play out. However, the longer term effects on the economy will ultimately depend on the trade deal that they work out with the EU. 

Rayhanul Ibrahim is a writer for Yahoo Finance.

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