IMF cuts world economic growth forecast after Brexit vote

The IMF has cut its world economic growth forecast for this year and next after the UK’s vote to leave the European Union, with a better-than-expected performance earlier this year giving way to a more pessimistic outlook.

The IMF said the vote means greater political uncertainty and likely forestalled investment. It cut its forecast for world economic growth by a fairly modest 0.1 percentage points for both this year and next, to 3.1 per cent and 3.4 per cent, respectively, from forecasts made in April.

“This deterioration reflects the expected macroeconomic consequences of a sizeable increase in uncertainty, including on the political front,” the IMF said in its update. “This uncertainty is projected to take a toll on confidence and investment, including through its repercussions on financial conditions and market sentiment more generally.”

The IMF’s more downbeat view is in line with many forecasters but carries added weight because of its role as an agent of international financial stability, which gives it special access to many countries’ economic data.

“As of June 22 we were … prepared to upgrade our projections slightly but Brexit has thrown a spanner in the works,” said Maury Obstfeld, IMF economic counsellor and research department director. “The UK’s June 23 vote to leave the EU adds downward pressure at a time when growth was already at risk of slowing because of pre-existing risks.”

Breaking down its forecast, IMF economists said the impact would be felt most by advanced European economies, and less so by the US and China, with a wide variation expected for emerging economies.

The biggest impact within Europe is on the UK, where the IMF downgraded its growth forecast by 0.2 percentage points for this year and 0.9 for next year, to 1.7 and 1.3 per cent, respectively. Germany’s forecast was upgraded by 0.1 this year to 1.6 per cent because of a better-than-expected performance so far, but downgraded for next year by 0.4 point to 1.2 per cent.

The big question mark is over how the UK will carry through its exit from the European Union and the timing and terms of the divorce.

The negotiating process itself could have a negative impact on the world economy, the IMF says.

“Prolonged negotiations that are likely to precede a new relationship between the United Kingdom and the European Union could affect global growth negatively,” it warned.

There would be a further dampening effect on the world economy if negotiations between the UK and the EU were to break down, necessitating a reversion to World Trade Organization rules, followed by a possible large-scale relocation of UK financial services business to the euro area and a recession in the UK with spillover effects on the EU and world economies.

The IMF said it would issue a fuller report on the likely impact in October.

In the emerging market economies, a mixed impact was expected so that overall there is no change in the forecast for the group, but a sharp downgrade in the growth forecast for sub-Saharan Africa and a more modest downgrade for next year for the Middle East, North Africa, Afghanistan and Pakistan.

“Middle East oil exporters are benefiting from the recent modest recovery in oil prices while continuing fiscal consolidation in response to structurally lower oil revenues, but many countries in the region are still plagued by strife and conflict,” the IMF said.

The Middle East area forecast for next year was cut by 0.2 points to 3.3 per cent as the IMF cut its assumption for its oil price basket by US$1.50 to $50 per barrel.

The IMF’s forecast changes are likely to have the biggest influence on investors’ views of world economic growth and emerging economies, although less so in advanced economies, especially European, said Peter Sidorov, a European economist at Deutsche Bank in London.

“The IMF’s breadth makes its figures very good for global comparisons, but the individual country forecasts will typically be less detailed than more local institutions, for example the European Commission for the euro area,” Mr Sidorov said.

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