IMF: Brexit Has Thrown ‘Spanner in the Works’ of Global Economic Growth

IMF

The International Monetary Fund has cut its forecast for global economic growth in 2016 and 2017 following the UK’s decision to leave the European Union.

The IMF warned about negative economic effects that would follow a vote to leave prior to the referendum and has now reinforced its claims by cutting both its World Economic Outlook and it’s forecast for the UK economy for both this year and next.

Back in April, the IMF said that they expected the global economy to grow by 3.5% in 2017; now it has been revised down to 3.4%. Similarly, their forecast for 2016 has been scaled back from 3.2% to 3.1%.

The UK economy alone is expected to take more of a hit, according to the IMF. In 2016, they expect UK economic growth to be at 1.5%, instead of the 1.7% predicted in April, and their 2017 forecast has been cut by almost 1%, down to 1.3% from 2.2%.

The IMF’s Economic Counsellor and Research Director, Maury Obstfeld, said: that these downward revisions are a direct result of the Brexit vote, following otherwise generally positive signals for the first half of this year.

He said: “The first half of 2016 revealed some promising signs, for example, stronger than expected growth in the euro area and Japan, as well as a partial recovery in commodity prices that helped several emerging and developing economies.

“As of June 22, we were therefore prepared to upgrade our 2016-17 global growth projections slightly.

“But Brexit has thrown a spanner in the works.”

The problem, as has been explained by many in recent weeks, is one of uncertainty. The medium to long term effects of Brexit are still unknown in the UK let alone for the rest of the world, but it is precisely this uncertainty that is being seen as cause for concern by many. The uncertainty in the UK is political as much is economic – the appointment of Theresa May does preclude some uncertainty but the nature of her premiership and future policies is still not known.

Obstfeld said: “The real effects of Brexit will play out gradually over time, adding elements of economic and political uncertainty that could be resolved only after many months.

“This overlay of extra uncertainty, in turn, may open the door to an amplified response of financial markets to negative shocks.”

Nonetheless, the IMF was fairly unambiguously critical in its characterisation of the fallout from Brexit.

“The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies,” it said in a statement.

“The vote in the United Kingdom in favour of leaving the European Union adds significant uncertainty to an already fragile global recovery.

“The vote has caused significant political change in the United Kingdom, generated uncertainty about the nature of its future economic relations with the European Union and could heighten political risks in the European Union itself.

“This erosion of confidence was reflected in a large initial sell-off in global financial markets, which has since partly reversed. But continuing uncertainty is likely to weigh on consumption and especially investment.”

As well as the slight headline reductions, the IMF offered two more possible scenarios (one ‘moderately worse’ and one ‘much worse’), but Obstfeld explained that the market resilience shown in the immediate aftermath of the referendum likely means that these worse case scenarios are unlikely to materialise.

He said: “The main reason we place less weight on these alternative scenarios, especially the more severe one, is that financial markets have proven resilient in the weeks after the referendum, re-pricing in an orderly fashion to absorb the news.”

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