The International Monetary Fund has cut its forecasts for global economic growth for 2016 and 2017 in the wake of the UK’s vote to leave the European Union.
In its latest World Economic Outlook Update the IMF said: “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.”
The IMF now expects the global economy to expand 3.1% this year and 3.4% in 2017 – a 0.1 percentage point reduction for both years relative to its April outlook.
The UK economy will expand by 1.7% this year, 0.2 percentage points less than forecast in April. Next year, the nation’s growth will slow to 1.3%, down by 0.9 percentage points from the April estimate and the biggest reduction among advanced economies.
For the euro area, the IMF has raised its forecast by 0.1 percentage points this year, to 1.6%, and lowered it by 0.2 percentage points in 2017, to 1.4%.
Had it not been for Brexit, the IMF said it was prepared to leave its outlook for this year broadly unchanged as better-than-expected euro area performance offset disappointing US first-quarter growth.
The IMF also had been prepared to raise its outlook for 2017 slightly, by 0.1 percentage points, on the back of improved performance in a few big emerging markets, in particular Brazil and Russia.
“The real effects of Brexit will play out gradually over time, adding elements of economic and political uncertainty,” said Maurice Obstfeld, IMF chief economist and economic counsellor. “This overlay of extra uncertainty, in turn, may open the door to an amplified response of financial markets to negative shocks.”
OUTLOOK FOR KEY MARKETS
Brexit’s fallout is likely to be felt in Japan, where a stronger yen will limit growth. The IMF cut its 2016 growth forecast by 0.2 percentage points to 0.3%. Next year, Japan’s economy, the world’s third-largest, is expected to expand by 0.1% – 0.2 percentage points more than predicted in April, due to the postponement of the consumption tax increase.
In the US, weaker-than-expected growth in the first quarter has prompted the IMF to reduce its 2016 forecast to a gain of 2.2% – 0.2 percentage points less than the April outlook. The IMF left its 2017 forecast for US growth unchanged at 2.5%.
China’s growth forecast for 2016 is up 0.1 percentage points, to 6.6% and is unchanged for 2017 at 6.2%. The IMF said that Brexit fallout was likely to be muted for China, the world’s second-largest economy, because of 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 IMF identified other risks to its outlook, which could be further exacerbated by Brexit. It cited “unresolved legacy issues in the European banking system, in particular in Italian and Portuguese banks”.
The report said: “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.”
It warned that “political divisions within advanced economies may hamper efforts to tackle long-standing structural challenges and the refugee problem” and that “a shift toward protectionist policies is a distinct threat”.
Geopolitical tensions and terrorism are also taking a heavy toll on the outlook in several economies, especially in the Middle East, with further cross border ramifications.