The International Monetary Fund is forecasting the global economy to increase at a 3.1 percent pace in 2016 and 3.4 percent in 2017, both down 0.1 percentage points from previous projections, following the UK’s surprise vote last month to leave the EU.
The International Monetary Fund (IMF) has downgraded its global growth projections for 2016 and 2017, the fund said Tuesday.
IMF is now forecasting the global economy to increase at a 3.1 percent pace this year and 3.4 percent next year, both down 0.1 percentage points from previous projections.
The fund attributed the downward revision primarily to the United Kingdom’s surprise vote to leave the European Union last month and continued uncertainty in global markets.
“The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies,” IMF said in its latest World Economic Outlook Update.
“Brexit has thrown a spanner in the works,” added IMF Chief Economist and Economic Counselor Maurice Obstfeld, noting that with the event still unfolding, it is still very difficult to quantify potential market repercussions.
Although most financial markets have recovered from the post-Brexit selloff, IMF warned the repercussions of the referendum will continue to be revealed over time. The fund now projects the UK economy will expand 1.7 percent this year, 0.2 percentage point less than forecast in April, and 1.3 percent next year, a 0.9 point reduction from the April estimate and the largest reduction among advanced economies.
The fund raised its 2016 forecast for eurozone growth 0.1 points to 1.6 percent, but lowered it 0.2 points to 1.4 percent for 2017.
IMF noted, however, its current outlook is still dependent on is “benign assumption” that the important relationship between the UK and the European Union with regard to trade and finance will remain relatively unchanged.
But this is hardly a given considering the political unrest that led to the Brexit vote and fund economists warned that further negative outcomes are “a distinct possibility.” A lengthy and contentious negotiation, for example, could weigh on economic growth, dropping it to 2.8 percent for 2016 and 2017.
“This overlay of extra uncertainty, in turn, may open the door to an amplified response of financial markets to negative shocks,” said Obstfeld.
Due to the high level of uncertainty surrounding the fallout and implications of the Brexit, the IMF report outlined two scenarios that would reduce world growth to less than 3 percent this year and next.
“In the first, ‘downside’ scenario, financial conditions are tighter and consumer confidence weaker than currently assumed, both in the U.K. and the rest of the world, until the first half of 2017, and a portion of UK financial services gradually migrates to the euro area. The result would be a further slowdown of global growth this year and next,” the fund said.
“The second, ‘severe’ scenario, envisages intensified financial stress, particularly in Europe, a sharper tightening of financial conditions and a bigger blow to confidence. Trade arrangements between the UK and the EU would revert to World Trade Organization norms. In this scenario, the global economy would experience a more significant slowdown through 2017 that would be more pronounced in advanced economies.”
IMF in the report also decreased its forecasts for economic growth in the United States 0.2 points to 2.2 percent due to weaker-than-expected growth in the first quarter.
In other advanced economies, IMF said the effects of the Brexit will likely be felt in Japan, where a stronger yen will limit growth, but will most likely be “muted” in China. The fund cut its 2016 growth forecast for Japan, the world’s third-largest economy, 0.2 points to 0.3 percent but raised it 0.2 percent from April predictions to 0.1 percent for 2017 due to the postponement of a consumption tax increase.
China’s growth forecast for 2016 is up 0.1 point to 6.6 percent, and unchanged for 2017 at 6.2 percent thanks to its limited trade and financial links with the UK.
“However, should growth in the European Union be affected significantly, the adverse effect on China could be material,” the IMF said.
“The outlook for other emerging and developing economies remains diverse and broadly unchanged relative to April,” it added. “That said, gains in the emerging group are matched by losses in low-income economies. Indeed, low-income countries saw a large downward revision in 2016, in large part driven by the economic contraction in Nigeria, and also worsened outlook in South Africa, Angola, and Gabon.”
Additional downside risks to IMF outlook that could be further exacerbated by Brexit include “unresolved legacy issues in the European banking system, in particular in Italian and Portuguese banks,” according to the fund.
“Protracted financial market turbulence and rising global risk aversion could have severe macroeconomic repercussions, including through the intensification of bank distress, particularly in vulnerable economies.”
IMF also warned that “political divisions within advanced economies may hamper efforts to tackle long-standing structural challenges and the refugee problem” and said “a shift toward protectionist policies is a distinct threat.” It added that geopolitical tensions and terrorism are also taking a heavy toll on the outlook of several economies, especially in the Middle East.
IMF downgrades global growth projections
