IMF Cuts Global Growth Forecasts on Brexit, Warns of Risks to Outlook

IMF News, July 19, 2016

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The IMF cut its forecasts for global economic growth in response to the U.K. vote to leave the European Union, citing a “substantial” increase in economic, political, and institutional uncertainty.
Global economy projected to expand 3.1 percent this year and 3.4 percent in 2017.
Those forecasts represent a 0.1 percentage point reduction for both years relative to the IMF’s April World Economic Outlook.

Global
- 2016: 3.1 percent
- 2017: 3.4 percent
- Revision vs. April WEO: −0.1 percentage point (both years)
United Kingdom (U.K.)
- 2016: 1.7 percent (0.2 percentage point less than April)
- 2017: 1.3 percent (0.9 percentage point less than April; largest reduction among advanced economies)
Euro area
- 2016: 1.6 percent (raised 0.1 percentage point)
- 2017: 1.4 percent (lowered 0.2 percentage point)
Japan
- 2016: 0.3 percent (cut by 0.2 percentage point)
- 2017: 0.1 percent (0.2 percentage point more than predicted in April)
United States
- 2016: 2.2 percent (0.2 percentage point less than April)
- 2017: 2.5 percent (unchanged)
China
- 2016: 6.6 percent (up 0.1 percentage point)
- 2017: 6.2 percent (unchanged)
Emerging and developing economies: outlook remains diverse and broadly unchanged relative to April; low-income countries saw a large downward revision in 2016 driven largely by the economic contraction in Nigeria and worsened outlook in South Africa, Angola, and Gabon.

IMF notes forecasts are conditional on “benign” assumptions: uncertainty wanes gradually, EU and U.K. avoid a large increase in economic barriers, and financial market fallout is limited.
The IMF outlined two adverse scenarios that would reduce world growth to less than 3 percent in 2016 and 2017:
- Downside scenario:
- Financial conditions tighter and consumer confidence weaker than currently assumed (in the U.K. and the rest of the world) until the first half of 2017.
- A portion of U.K. financial services gradually migrates to the euro area.
- Result: further slowdown of global growth this year and next.
- Severe scenario:
- Intensified financial stress, particularly in Europe, sharper tightening of financial conditions, and a bigger blow to confidence.
- Trade arrangements between the U.K. and the EU revert to World Trade Organization norms.
- Result: “the global economy would experience a more significant slowdown” through 2017, more pronounced in advanced economies.

“Unresolved legacy issues in the European banking system, in particular in Italian and Portuguese banks.”
Protracted financial market turbulence and rising global risk aversion could intensify bank distress, particularly in vulnerable economies.
Political divisions within advanced economies may hamper efforts to tackle long-standing structural challenges and the refugee problem.
“A shift toward protectionist policies is a distinct threat.”
Geopolitical tensions and terrorism are weighing heavily on outlooks in several economies, especially in the Middle East.

The IMF calls for “a combination of near-term demand support and structural reforms to reinvigorate medium-term growth” in advanced economies, which face “significant economic slack and a weak inflation outlook.”
Policymakers in the U.K. and the EU should aim 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.’”
Advanced nations should avoid relying too heavily on monetary policy alone and should “exploit synergies among a range of policy tools.”
The IMF recommends “stronger reliance on measures to support domestic demand, especially in creditor countries with policy space,” to help reduce global imbalances and contribute to stronger world growth.

Source: International Monetary Fund — IMF News, July 19, 2016.