IMF modestly cuts global growth forecast, warns of bigger Brexit risks
The global economy is expected to grow a bit more slowly than expected because of the United Kingdom’s recent vote to leave the European Union, but there are “distinct” risks of a more severe impact, the International Monetary Fund said Tuesday.
The IMF attributed its surprisingly mild downward revision despite the so-called Brexit vote to better-than-expected world growth so far this year and the Fund’s assumption that the uncertainty fomented by the decision will gradually ebb. It also pointed to the sharp rebound in financial markets following an initial post-Brexit selloff.
The agency expects global growth of 3.1% this year and 3.4% in 2017, 0.1 percentage points below its April forecast for both years. Yet it also revealed that, pre-Brexit, it had been poised to slightly upgrade its growth estimate — by 0.1 percentage points in 2017 — citing stronger-than-expected activity in the euro area, China and other emerging markets.
“But Brexit has thrown a spanner in the works,” IMF Economic Counselor Maurice Obstfeld said at a news conference in Washington.
The IMF’s benign forecast is based on the assumptions that the UK’s trade and other economic ties to Europe are renegotiated “to avoid a large increase in economic barriers,” and there’s no major market disruption and limited political fallout, the agency said.
The U.K. is expected to suffer the biggest hit, with growth falling 0.2 percentage points this year and nearly a percentage point in 2017, to 1.7% and 1.3%, respectively. Growth in the euro area was revised up 0.1 percentage point to 1.6% in 2016 amid strong domestic demand, but then down 0.2 percentage points to 1.4% in 2017 because of Brexit.
The U.S. economy is expected to be largely unaffected by Brexit as the Federal Reserve keeps interest rates lower for longer. After a weak first quarter, the economy is expected to grow 2.2% this year, below the IMF’s 2.4% April forecast. Its 2.5% estimate for next year was unchanged.
Obstfeld, however, added an ominous note of caution. “Brexit will play out gradually over time, adding elements of economic and political uncertainty that could be resolved only after many months,” he said. That, he said, “may open the door to an amplified response of financial markets to negative shocks.”
He added, "With less than four weeks of data, it's hard to tell what the ultimate outcome will be."
As a result, the IMF took the unusual step of laying out two more dire scenarios it labeled “downside” and “severe.” In those narratives, U.K.-euro talks are prolonged and arduous, financial market stresses intensify and consumer and business confidence weaken. In the “downside” scenario, growth would be 2.9% this year and 3.1% in 2017; in the “severe” case, it would be 2.8% in both years.
Obstfeld said the IMF put less weight on those scenarios because financial markets have been resilient since the British referendum and major central banks have been ready to provide liquidity to markets."The market's recovery has certainly been reassuring," he said.
Yet he cited other risks to growth as well, including bad loans that have lingered on the books of euro area banks since the financial crisis, political strife and the European refugee crisis.
Among other regions:
• China’s growth prospects have improved modestly because of multiple interest rate cuts, increased government spending and stronger credit growth. The world’s second-largest economy is expected to grow 6.6% this year, up slightly from the previous estimate, and 6.2% in 2017.The country is undergoing a bumpy shift from an economy driven by investment to domestic consumption.
• In Japan, the yen’s appreciation, which hurts exports, led the IMF to modestly lower its growth forecast to 0.3% this year. It raised its estimate for 2017 to 0.1% because a sales tax hike was delayed until 2019, but the negative effects of the stronger yen tempered the upgrade.
• In emerging markets, higher oil prices are providing some relief to Russia and Brazil’s contraction early in the year was less severe than anticipated, moderating recessions in both countries.