In the wake of the United Kingdom’s vote to leave the European Union, the International Monetary Fund (IMF) has cut its forecasts for global economic growth and warns that Brexit has brought a new wave of uncertainty to the world stage.
The IMF’s World Economic Outlook Update, released Tuesday, cuts its 2016 and 2017 global growth forecast by 0.1 percentage points for each year, compared to what it had predicted in April. The Brexit vote “implies the materialization of an important downside risk for the world economy,” according to the report.
The IMF had been ready to upgrade its outlook until the vote, Maury Obstfeld, IMF chief economist and economic counsellor, said at a press conference on Tuesday, but “Brexit has thrown a spanner in the works.”
It is early days following Brexit, which the British public narrowly voted for on June 23, and the report points out that “with the event still unfolding, it is very difficult to quantify its potential repercussions.”
“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,” Obstfeld said.
Obstfeld noted that the IMF has less than four weeks of data in regards to Brexit, and the outlook could certainly change. Although the vote caught markets by surprise, he said, the market reaction was encouraging.
“The market reaction has certainly been reassuring, in that markets remained orderly, market function was maintained quite smoothly, and that was a good thing because a number of people worried ex ante that that might not be the case,” Obstfeld said. “With less than four weeks of data, though, it is hard to tell what the ultimate outcome is going to be. Negotiations have not started, Article 50 has not been triggered, so there is a lot of uncertainty. And as we see more data starting to come in, late in August and the fall, we may revise our picture.”
The agency promises in its report it will have a “more thorough assessment of the global outlook” in the October World Economic Outlook.
For 2017, the baseline global growth forecast “has been revised down modestly relative” to the April edition of the WEO, with the global forecast cut by 0.1 percentage points for 2016 and 2017. The impact will be concentrated in “advanced European economies,” the report notes, while predicting a muted effect in other places such as the United States and China.
“From a macroeconomic perspective, 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,” the report states.
Paolo Mauro, a senior fellow at the Peterson Institute for International Economics, said that “on balance, the revision looks small — but it’s larger than it looks.”
“They’re revising 0.1 down, but the background is they would have revised 0.1 up,” Mauro told The Cipher Brief. “For an economist it is a significant revision, particularly given the forecast that had been published in mid-April, so just a couple of months difference.”
But it is key to note, as the IMF report’s authors did, that Brexit is really a wait and see game at the moment. “The extent of Brexit is unknown and both markets and the reality so far is that not much has happened,” he said.
“There will be periodic crises – maybe one day the negotiations go badly and there may be a little shock on the markets,” Mauro said. “But the baseline is that it’s a kind of prolonged, gradual shock.”
The new British government led by Prime Minister Theresa May signaled on Tuesday it would not invoke Article 50 to leave the EU, which would then begin the process of up to two years of negotiations to sever ties and establish a new working relationship, this year. Government lawyer Jason Coppell told the British high court that “the current position is that notification will not occur before the end of 2016,” but he did say that could change, Reuters reported.
The IMF report also highlights the need for policymakers “to stand ready to act more aggressively and cooperatively should the impact of financial market turbulence and higher uncertainty threaten to materially weaken the global outlook.” In terms of policy, the IMF said that advanced economies should avoid depending too much on monetary policy to help boost their economies.
“Stronger reliance on measures to support domestic demand, especially in creditor countries with policy space, would help reduce global imbalances while contributing to stronger world growth,” the report reads.
The IMF reduced its 2016 forecast for the United States down 0.2 percentage points from April due to weaker-than expected growth, although the country’s 2017 forecast is still holding at 2.5 percent. China, meanwhile, saw a slight boost in its 2016 global forecast by 0.1 percentage point.
“There was so much concern about China last year, and now we’ve kind of forgotten about it,” Mauro said. “In some ways, the authorities are pumping stimulus into the system, not huge amounts, but a little bit more, and that’s holding growth up. I’m hoping they don’t pump too much credit into the system.”
The IMF predicts the “direct impact of the U.K. referendum will likely be limited, in light of China’s low trade and financial exposure to the United Kingdom.”
“However, should growth in the European Union be affected significantly, the adverse effect on China could be material,” the report states.
The United Kingdom, predictably, “experienced the largest downward revision in forecasted growth” for advanced economies.
“While growth in the first part of 2016 appears to have been slightly stronger than expected in April, the increase in uncertainty following the referendum is projected to significantly weaken domestic demand relative to previous forecasts, with growth revised down by about 0.2 percentage points for 2016 and by close to 1 percentage point in 2017,” the report states.
For the euro area, the report noted that it revised its 2017 growth down by 0.2 percentage points from April given the uncertainty on consumer and business confidence, as well as potential stress on banks.
“2016 growth is still projected to be slightly higher, given outcomes in the first half of the year. Delays in tackling legacy issues in the banking sector, however, continue to pose downside risks to the forecast,” the report states.
