IMF downgrades world growth projections after Brexit vote

19 Jul 16

The International Monetary Fund has downgraded its growth projections for the world economy in the wake of the UK’s Brexit vote.

The fund said it had revised down its predictions for global growth for 2016 and 2017 by 0.1 percentage points on April’s forecast, since the UK’s vote to leave the European Union unleashed “sizeable uncertainty” on markets.

Maurice Obstfeld, the IMF’s economic counsellor and director of its research department, said the global economy had been showing “promising signs” of recovery, but that Brexit had “thrown a spanner in the works”.

Before the vote, the fund had been preparing to raise its global growth projections slightly. However, it has now downgraded its forecasts for 2016 to 3.1% and 3.4% for 2017.

The UK saw the largest cut of all major economies, with growth revised down by 0.2 percentage points for 2016 and by 1 percentage point for next year.

The euro area is also likely to be harder hit than other economies, the fund said. This is despite the fact that the area had seen higher-than-expected growth in the first quarter of the year and had been on track for an improved outlook today before the vote.

While it upgraded its 2016 projections for the euro area slightly to reflect its improved performance at the beginning of this year, it has cut its predictions for 2017 by 0.2 percentage points relative to April.

Elsewhere however, the fund said the impact of Brexit is likely to be “relatively muted”. The US saw its growth forecasts trimmed too, but due to weaker-than-expected growth in the first quarter of 2016. Japan also had its forecast revised down by 0.2 percentage points as the appreciation of the yen is expected to take a toll on growth.

China had its 2017 growth forecast upgraded slightly, with 2016 remaining broadly unchanged. However, the fund noted that a significant slowdown in European Union growth could hit the nation’s economy.

India, which stole the title of fastest growing major economy from China earlier this year, saw a slight slowing in projected growth. The ailing Russian economy and the Middle East have had some respite thanks to higher oil prices, but the fund said the latter remains plagued by instability.

Brazil’s recession is likely to be slightly less severe, with a return to growth in 2017, but the fund warned on the threat of political and policy uncertainties in a country currently in the throes of a wide reaching corruption scandal.

Sub-Saharan Africa however was not so fortunate, with growth projections revised down “substantially” (1.4 percentage points) as the region’s major economies attempt to adjust to the commodity price slump, which has seriously impacted revenues.

Nigeria’s economy is forecast to contract by 1.8 percentage points, while South Africa’s growth is expected to remain flat at 0.1% in 2016.

The fund said that as well as ongoing risks from, for example, the stubborn legacy of the financial crisis, political divisions in advanced economies, conflict, terrorism, climate events, and diseases like Zika, further “negative outcomes” from Brexit were a “distinct possibility”.

The IMF’s modest downgrade for global growth is based on the assumption that there will be a gradual reduction in uncertainty following the vote. It assumes the UK and the EU’s future agreement will guarantee no big increase in economic barriers, will result in no major financial market turbulence and cause only a limited political fallout.

It also published two other predictions, one that is “moderately worse” and another that is “much worse”, depending on how the UK organises its new relationship with the EU and the rest of the world.

The worst case scenario would see global growth slow to 2.8% this year and in 2017. But Obstfeld said there was less emphasis on these alternative scenarios as financial markets are showing resilience and adjusting in an orderly fashion to the news of Britain’s exit vote. 

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