A Spanner in the Works: An Update to the World Economic Outlook
IMF Blog, July 19, 2016
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- Authors: Maurice Obstfeld
- Published: July 19, 2016
Brexit, immediate effects, and revised global projections
- Event dates and authorship:
- United Kingdom vote to leave the European Union on June 23, 2016.
- Analysis by Maurice Obstfeld, July 19, 2016.
- Reference date: as of June 22 we were prepared to upgrade 2016-17 projections.
- Revised global growth projections:
- April Outlook: 3.2 percent global output growth in 2016 and 3.5 percent in 2017.
- Update (incorporating Brexit and other developments): reduced both projections by 0.1 percentage point, to 3.1 and 3.4 percent, respectively.
- Geographic concentration of the slowdown:
- The new baseline concentrates the growth slowdown through 2017 in the advanced countries.
- Outside advanced economies, gains in the emerging group are matched by losses in low-income economies.
- Sub-Saharan Africa: growth reduction driven by difficult macroeconomic situations in Nigeria and South Africa; implication that in 2016 regional output growth will fall short of population growth, implying declining per capita incomes.
- Scope of Brexit’s direct effects:
- Direct effects specifically due to Brexit are greatest in Europe, especially the United Kingdom.
- Projections for other areas are little changed by Brexit.
Alternative Brexit scenarios and financial-market considerations
- Model-based illustrative scenarios presented alongside the baseline:
- One scenario moderately worse than the baseline.
- One scenario much worse than the baseline.
- Drivers required for alternative scenarios to materialize:
- More disruptive international-trade effects of Brexit than currently anticipated.
- Greater effects of uncertainty on economic activity than yet evident, triggering severely negative financial feedback loops and widespread banking-sector stress in the euro area.
- Why the baseline retains more weight:
- Financial markets have proven resilient in the weeks after the referendum, repricing in an orderly fashion.
- Benign market outcome attributed importantly to the perception—and reality—of major central banks’ readiness to provide liquidity to markets.
- Persisting vulnerabilities, especially in some of Europe’s banks, nonetheless remain.
Other continuing downside risks to the outlook
- Ongoing structural and cyclical vulnerabilities:
- Strains from refugees and other displaced people, with political and economic ramifications.
- Geopolitical risks and political strife in some countries.
- Crisis legacies: long-term unemployment and associated loss of human capital; nonperforming loans clogging bank balance sheets.
- Emerging and low-income commodity exporters facing balance of payments pressures, debt overhangs, and low investment.
- China’s transition to a more consumer- and service-oriented growth model could be bumpy given continuing credit expansion supporting the official growth target.
- Interaction with lower potential growth:
- Expectations of long-term potential growth have fallen, in part due to demographic and technological trends.
- Lower potential growth reduces demand today and investment, generating even lower potential output going forward.
- Weak demand can erode productive capacity via loss of labor skills, discouraged labor force participation, lower business dynamism, and slower diffusion of technological best practice.
Policy implications and recommended actions
- Overarching guidance:
- Policymakers should not accept current growth rates as a “new normal.”
- Political leaders should offer a narrative explaining long-term developments and propose policy actions to restore middle classes and a sense that benefits of growth are more fairly shared.
- Policy mix and priorities:
- Deploy all main policy levers efficiently: growth-friendly fiscal policies, well-sequenced structural policies, and monetary policy support for anchored inflation expectations.
- Design efficient policy packages to exploit synergies across instruments and across countries.
- Consider incidence of measures across different income groups and accompany reforms with actions to support social cohesion while promoting economic growth and stability.
Source: A Spanner in the Works: An Update to the World Economic Outlook (Maurice Obstfeld, July 19, 2016).
Content in this bundle
- IMF博客：更复杂的局面：世界经济展望最新预测； 2016年7月19日