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July 20, 2016

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IMF cuts global growth forecasts for next 2 years over Brexit fears

Source: Agencies | July 20, 2016, Wednesday | Print Edition

THE International Monetary Fund cut its global growth forecasts for the next two years yesterday, citing uncertainty over Britain’s looming exit from the European Union.

The move included a nearly full percentage point cut in the UK’s 2017 growth forecast.

Cutting its World Economic Outlook forecasts for the fifth time in 15 months, the IMF said that it now expects global GDP to grow by 3.1 percent in 2016 and by 3.4 percent in 2017 — down 0.1 percentage points for each year from estimates issued in April.

The IMF said that despite recent improvements in Japan and Europe and a partial recovery in commodity prices, the UK’s Brexit vote had created a “sizeable increase in uncertainty” that would take its toll on investment and market and consumer confidence.

On the day before Britain’s June 23 EU referendum, the IMF was “prepared to upgrade our 2016-17 global growth projections slightly,” IMF chief economist Maury Obstfeld said in a statement. “But Brexit has thrown a spanner in the works.”

The IMF said the impact will hit hardest in Britain itself, where the body cut its 2016 growth forecast to 1.7 percent, down 0.2 percentage points from its April forecast. It cut the 2017 UK forecast more sharply, by 0.9 percentage points, to 1.3 percent.

The IMF lifted its eurozone forecast slightly for 2016, but cut its 2017 outlook by 0.2 percentage points to 1.4 percent for 2017.

It said last week that Brexit would have a “negligible” impact on the United States.

The IMF noted that its latest forecasts were made under relatively benign assumptions of a settlement between the EU and Britain that leads to limited political fallout, avoids a major increase in economic barriers and prompts no major further financial market disruptions.

But the IMF also modeled other scenarios, including a “severe” one in which the divorce negotiations go badly, financial stress intensifies, the UK-EU trading relationship reverts to World Trade Organization rules, and London loses a large portion of its financial services sector to continental Europe.

Under that scenario, Britain would fall into recession and global growth would slow to 2.8 percent in both 2016 and 2017, the IMF said.

A middle scenario labeled “downside” would see tighter financial conditions and lower consumer confidence than the baseline, with the UK losing some of its financial services sector to Europe. It shows global growth at 2.9 percent in 2016 and 3.1 percent in 2017.

Obstfeld said the financial market recovery following the initial Brexit shock helped persuade the IMF to go with the most benign of the three scenarios.

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