Goldman Sees A UK Recession, Shocked By A Fed "Tightening Cycle Unlike Any In Modern History"

Starting off the year, Goldman was prodigiously optimistic, bullish... and dead wrong. Since then the bank has cut its rate hike forecast from 4 to 3 to 2 and, now in the aftermath of Brexit, it has just the excuse to say that "our forecasted path for the funds rate now looks quite unlike any tightening cycle in modern Fed history—one increase, followed by an extended pause, followed by gradual but steady increases over the subsequent three years." Which, quite simply, is another way for Goldman to say it was dead wrong. Again.

Here is how Goldman throws in the towel on the whole rate hike thing.

And in a follow up note, Goldman cut its 2017 UK GDP forecast from 2.0% to 0.2%, as well as predicting a UK recession next year.

The direct effects of reduced access to the Single European Market is the smaller of the two channels. Negotiations on a withdrawal agreement and the separate agreement on the future relationship with the EU are multi-year processes. Some businesses, anticipating those changes, will cancel UK investment. But, in isolation, this does not precipitate a recession. Instead, the larger part of the transmission operates through the effects of uncertainty about what those trading relationships, and the regulatory framework that goes with them, will be. Policy uncertainties are reflected, and perhaps compounded, by changes in the leadership of the UK government and questions about Scottish independence.

We have therefore revised real GDP lower in 2016 by 0.5pp to 1.5%yoy and in 2017 by 1.8pp to 0.2%yoy. We expect a recession – albeit mild by historical standards – in the first half of next year. The weaker outlook will also weigh on the inflation outlook. As we had highlighted in our scenario analysis for a Leave decision, the weaker inflation outlook could be offset by the effects of Sterling depreciation and its impact on import prices. Yet, the latter effect is temporary and Sterling's weakening since the Leave decision has not yet been large enough to threaten an overshooting of the inflation target.

Needless to say, a UK recession means rate cuts, more QE by the BOE, and most importantly, it means no more rate hikes by the Fed, most likely ever again. We expect over the next few weeks for Goldman to give up on its "one rate hike" call, followed shortly thereafter by the admission that the next Fed move is a rate cut, just as the market now expects... just as we predicted last summer.