The International Monetary Fund has cut its forecasts for global economic growth this year and next as the unexpected U.K. vote to leave the European Union adds uncertainty to already-fragile business and consumer confidence.
“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,” according to the IMF’s World Economic Outlook Update released Tuesday.
“Brexit has thrown a spanner in the works,” said Maurice Obstfeld, IMF Chief Economist and Economic Counsellor. And with the event still unfolding, the report says that it is still very difficult to quantify potential repercussions.
According to the Fund, the economies of the United Kingdom (U.K.) and Europe will be hit the hardest by fallout from the June 23 referendum.
Global growth, already sluggish, will suffer as a result, putting the onus on policy makers to strengthen banking systems and deliver on plans to carry out much-needed structural reforms.
In particular, policymakers in the U.K. and the European Union (EU) will play a key role in tempering uncertainty that could further damage growth in Europe and elsewhere, the IMF said. It called on them to engineer a “smooth and predictable transition to a new set of post-Brexit trading and financial relationships that as much as possible preserves gains from trade between the U.K. and the EU.”
The global economy is projected to expand 3.1 percent this year and 3.4 percent in 2017, according to the IMF (see table). Those forecasts represent a 0.1 percentage point reduction for both years relative to the IMF’s April World Economic Outlook.
The U.K. economy will expand 1.7 percent this year, the IMF said, 0.2 percentage point less than forecast in April. Next year, the nation’s growth will slow to 1.3 percent, down 0.9 point from the April estimate and the biggest reduction among advanced economies. For the euro area, the Fund raised its forecast by 0.1 point this year, to 1.6 percent, and lowered it by 0.2 point in 2017, to 1.4 percent.
Because the future effects of Brexit are exceptionally uncertain, the 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 U.K. financial services gradually migrates to the euro area. The result would be a further slowdown of global growth this year and next.
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 U.K. 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.
In the U.S., weaker-than-expected growth in the first quarter prompted the IMF to reduce its 2016 forecast to a gain of 2.2 percent, 0.2 percentage points less than the April outlook. The IMF left its 2017 forecast for U.S. growth unchanged at 2.5 percent.
China’s growth forecast for 2016 is up 0.1 percentage point, to 6.6 percent, and is unchanged for 2017 at 6.2 percent. Brexit fallout is likely to be muted for China, the world’s second-largest economy, because of its limited trade and financial links with the U.K.
In addition, 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.”
