The International Monetary Fund cut its global growth forecasts for the next two years, citing uncertainty over Britain’s looming exit from the European Union.
The move included a nearly full percentage point cut in the UK’s 2017 growth forecast, Xinhua reported.
Cutting its World Economic Outlook forecasts for the fifth time in 15 months, the IMF said that it now expects global GDP to grow by 3.1% in 2016 and by 3.4% in 2017—down 0.1 percentage points for each year from estimates issued in April.
The IMF said that despite recent improvements in Japan and Europe and a partial recovery in commodity prices, the UK’s Brexit vote had created a “sizeable increase in uncertainty” that would take its toll on investment and market and consumer confidence.
On the day before Britain’s June 23 EU referendum, the IMF was “prepared to upgrade our 2016-17 global growth projections slightly,” IMF chief economist Maury Obstfeld said in a statement. “But Brexit has thrown a spanner in the works.”
The IMF said the impact will hit hardest in Britain itself, where the body cut its 2016 growth forecast to 1.7%, down 0.2 percentage points from its April forecast. It cut the 2017 UK forecast more sharply, by 0.9 percentage points, to 1.3%.
The IMF lifted its eurozone forecast slightly for 2016, but cut its 2017 outlook by 0.2 percentage points to 1.4% for 2017.
It said last week that Brexit would have a “negligible” impact on the United States.
Financial Stress
The IMF noted that its latest forecasts were made under relatively benign assumptions of a settlement between the EU and Britain that leads to limited political fallout, avoids a major increase in economic barriers and prompts no major further financial market disruptions.
But the IMF also modeled other scenarios, including a “severe” one in which the divorce negotiations go badly, financial stress intensifies, the UK-EU trading relationship reverts to World Trade Organization rules, and London loses a large portion of its financial services sector to continental Europe.
Under that scenario, Britain would fall into recession and global growth would slow to 2.8% in both 2016 and 2017, the IMF said.
A middle scenario labeled “downside” would see tighter financial conditions and lower consumer confidence than the baseline, with the UK losing some of its financial services sector to Europe. It shows global growth at 2.9% in 2016 and 3.1% in 2017.
Tempering Uncertainty
In its update report, the IMF left its growth forecasts for emerging market and developing economies unchanged at 4.1% (y/y) in 2016 and 4.6% (y/y) in 2017.
However, there is an indirect threat for Indonesia and other Asian emerging markets. The IMF states that "policymakers in the UK and EU will play a key role in tempering uncertainty that could further damage growth in Europe and elsewhere."
Indeed, an emerging market such as Indonesia is not so much affected by slowing economic growth in the UK as trade relations between both nations are not too significant (there exists small export exposure).
However, if economic growth in the EU is dragged down by low UK growth, then the impact (on Asia's emerging markets' export performance) starts to grow bigger.
This then implies another potential threat. Recently, Credit Suisse pointed out that the common theme across Asian economies is a high correlation between exports and private investment cycles. In other words, falling exports from Asia can frustrate private investment in these markets.
On the other hand, the Brexit issue manages to stop speculation about another interest rate hike in the US (a move that would encourage capital outflows from emerging markets). This context provides renewed opportunities for Asia's central banks to implement monetary policy easing, particularly as these banks' benchmark interest rates are currently higher than when the US 2013 taper tantrum occurred.
