Global Economic Growth Downgraded Due to Brexit Uncertainty

International Monetary Fund says uncertainty could roil global markets

Bank of England
Bank of England in London / AP
July 19, 2016

The International Monetary Fund downgraded its forecast for global economic growth due to uncertainty stemming from the United Kingdom’s vote to leave the European Union, according to a report the organization released Tuesday.

Global growth was projected in April to increase at a pace of 3.2 percent this year and 3.5 percent in 2017. Today’s forecasts were cut by 0.1 percentage point, so global growth is projected to expand at a rate of 3.1 percent this year and 3.4 percent in 2017.

"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. "Had it not been for Brexit, the IMF was prepared to leave its outlook for this year broadly unchanged as better-than-expected euro area performance offset disappointing U.S. first-quarter growth."

According to the report, the economies of the U.K. and Europe will be hardest hit. The organization predicts that economic growth in the U.K. will expand at 1.7 percent this year, 0.2 percentage points lower than previous projections. In Europe, economic growth is projected to expand at 1.6 percent this year, an increase of 0.1 percentage point, but it is projected to expand by 1.4 percent in 2017, a reduction of 0.2 percentage points from previous projections.

"The real effects of Brexit will play out gradually over time, adding elements of economic and political uncertainty," said Maurice Obstfeld, the organization’s chief economist. "This overlay of extra uncertainty, in turn, may open the door to an amplified response of financial markets to negative shocks."

The uncertainty surrounding Brexit could reduce global economic growth to less than 3 percent this year and next, which would be the lowest level of growth since 2009 when the economy was in the wake of a financial crisis.

This scenario could occur if consumer confidence became weaker and financial conditions became tighter, causing U.K. financial services to move to the European area. Global economic growth could also dip below 3 percent if trade arrangements between the U.K. and the EU went back to World Trade Organization norms.

"The IMF urged advanced nations to avoid relying too heavily on monetary policy to spur their economies and to exploit synergies among a range of policy tools," the report states. "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."

Published under: Economy