Two leading City institutions have cancelled predictions of an EU referendum recession and revised their economic forecasts higher in response to better than expected economic surveys.

Economists from Credit Suisse and Morgan Stanley lifted growth predictions for 2016 and 2017, removing the expectation of a recession, but they said the Brexit vote would still slow growth.

The upward revisions followed good August results in the three main purchasing manager surveys — for the services, manufacturing and construction sectors. Brexit-supporting MPs said the results demonstrate the economy would remain robust following the vote.

Credit Suisse increased its forecast for 2016 growth from 1 per cent to 1.9 per cent and its 2017 forecast from a contraction of 1 per cent to growth of 0.5 per cent. Its economists had been the second most pessimistic among those surveyed by the Treasury in August.

Sonali Punhani, an economist at Credit Suisse, said that recent data had demonstrated that the shock of Brexit was “materially less than we expected in late June”.

“Given the resilience of the data, combined with some political stability and the fact that people do not know how much Brexit will affect them, we now expect subdued growth, but not a recession,” she said.

Morgan Stanley said it had changed its forecast because of the latest data “from a sharp slowdown and Brecession, to a lesser slowdown, which narrowly avoids a technical recession”.

Both banks expected Brexit would harm the UK economy and both expected the shock would be felt after the Article 50 leaving process was triggered rather than the referendum result itself.

Melanie Baker of Morgan Stanley said that when households notice changes to the economy, they are likely to become more reluctant to spend. “We expect current resilience will be undermined over time by firms holding back on investment and hiring, and an erosion of purchasing power, as the weaker GBP drives a pick-up in inflation,” she said.
Morgan Stanley revised its forecasts up from 1.2 to 1.9 per cent for 2016 and in 2017 from 0.5 to 0.6 per cent.

Many economists have been revising their forecasts up in response to the latest data, but almost all still expect the UK economy to perform worse after Brexit.

In the latest Treasury survey, the average independent economic forecasts for total growth over the 2016 to 2020 period were 3.3 percentage points lower than those in May.