IMF World Economic Outlook (WEO) Update, July 2016: Uncertainty in the Aftermath of the U.K. Referendum
World Economic Outlook, July 19, 2016
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- Published: July 19, 2016
- Series: World Economic Outlook
Major findings and projected revisions
- Global growth forecasts for 2016 and 2017 were revised to 3.1 percent and 3.4 percent, respectively.
- The global outlook for 2016-17 has worsened relative to the April 2016 WEO, with a downward revision of 0.1 percentage points for both 2016 and 2017 (taking into account better-than-expected activity earlier in 2016 and Brexit effects).
- Advanced economies: growth revised down by 0.1 percentage points in 2016 and by 0.2 percentage points in 2017.
- Emerging market and developing economies: outlook remains broadly unchanged relative to April 2016 WEO.
- United Kingdom: growth revised down by about 0.2 percentage points for 2016 and by close to 1 percentage point for 2017.
- United States: 2016 growth forecast reduced by 0.2 percentage points; Brexit impact on U.S. projected to be muted.
- Euro area: 2017 growth revised down by 0.2 percentage points relative to April; 2016 projection slightly higher due to strong first-half outcomes.
- Japan: 2016 growth reduced by about 0.2 percentage points; 2017 growth upward revision now projected to be 0.2 percentage points given yen appreciation and tax policy changes.
- China: near-term outlook improved with a slight upward revision for 2016; overall outlook broadly unchanged relative to April.
- Brazil and Russia: outlooks improved modestly—Brazil’s 2016 recession projected to be slightly less severe with expected return to positive growth in 2017; Russia’s 2016 GDP decline now projected to be milder.
- Sub-Saharan Africa: growth projections revised down substantially; Nigeria is now projected to experience economic contraction in 2016.
- Pound sterling: weakened by about 10 percent in nominal effective terms between June 23 and July 15.
- Oil price assumptions: the WEO Update assumes prices about $10 higher for 2016 and 2017 than in April 2016 WEO; assumed futures-based prices are $42.9 in 2016 and $50.0 in 2017.
Economic and financial analysis
- Brexit is identified as the materialization of an important downside risk, increasing economic, political, and institutional uncertainty and weighing on confidence and investment through financial conditions and market sentiment.
- Initial market reaction was severe but generally orderly: equity prices declined worldwide (with bank equities in the U.K. and Europe substantially lower as of mid-July), safe-asset yields declined, and commodity prices, including oil, fell moderately but remained above April WEO assumptions.
- The baseline assumes a gradual reduction in uncertainty, arrangements that avoid large increases in economic barriers between the EU and the U.K., no major financial market disruption, and limited political fallout.
- Two alternative scenarios are outlined:
- Downside scenario: tighter financial conditions and lower confidence until the first half of 2017, partial relocation of U.K. financial services to the euro area, and further global growth slowdown relative to the baseline.
- Severe scenario: intensified financial stress (especially in advanced Europe), negotiations that revert trade arrangements to WTO rules, larger relocation of financial services, recession in the U.K., and a more pronounced global slowdown.
- Other salient risks: unresolved legacy issues in European banking (notably Italian and Portuguese banks), potential intensification of bank distress, China’s credit-driven growth risks, fiscal pressures in commodity exporters, political divisions and protectionism, geopolitical tensions, climate-related events (e.g., drought in East and Southern Africa), and disease outbreaks (e.g., Zika).
Policy implications and recommendations
- Central banks: major central banks were prepared and responded rapidly to provide domestic currency liquidity and foreign exchange liquidity via swap lines; this preparedness has supported market resilience.
- United Kingdom and European Union: priority is a smooth and predictable transition to post-exit trading and financial relationships that preserves gains from trade and reduces uncertainty.
- Advanced economies: with significant slack and weak inflation, policymakers should combine near-term demand support with structural reforms to boost medium-term growth; avoid placing the entire stabilization burden on central banks.
- Policy coordination: effectiveness of support enhanced by exploiting synergies across policy tools and increased reliance on measures to support domestic demand in creditor countries with policy space to reduce global imbalances.
- Financial sector: tackle remaining vulnerabilities decisively—especially in Europe’s banking sector—to ensure resilience to prolonged uncertainty and turbulence.
- Emerging market and developing economies: policy challenges are diverse but include bolstering medium-term growth via structural reforms; strengthen defenses against prolonged global financial turbulence and tighter external conditions.
- Specific priorities for emerging markets: rein in excess credit growth where needed; support healthy bank balance sheets; contain maturity and currency mismatches; maintain orderly market conditions.
- Readiness to act: policymakers should be prepared to act more aggressively and cooperatively if financial market turbulence and higher uncertainty threaten to materially weaken the global outlook.
Key quantitative assumptions and notes
- Baseline global growth: 3.1 percent in 2016; 3.4 percent in 2017.
- Revisions relative to April 2016 WEO: global growth down by 0.1 percentage points for both 2016 and 2017.
- Pound sterling depreciation: about 10 percent (nominal effective) between June 23 and July 15.
- Oil price assumptions (simple average of U.K. Brent, Dubai Fateh, and West Texas Intermediate): $42.9 in 2016; $50.0 in 2017.
- Oil price assumptions are about $10 higher for 2016 and 2017 than in the April 2016 WEO.
- The baseline assumes real effective exchange rates remain constant at levels prevailing during June 24–June 28, 2016.
Source: IMF, World Economic Outlook Update, July 2016
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