IMF warns Brexit could cause severe global damage

Brexit, UK, European Union, EU

A vote for the UK to exit the European Union could do “severe regional and global damage”, says the IMF, as it downgrades its global growth forecast for the second time this year.

A vote for a Brexit at the June referendum would disrupt established trading relationships and add to political strains in Europe stemming from the Syrian refugee crisis, the IMF’s semi-annual World Economic Outlook report says.

The IMF has downgraded the 2016 UK growth forecast by 30 basis points from its January forecast, to 1.9 per cent, and  has reduced the 2017 forecast to 2.2 per cent. Lower energy prices and a buoyant property market will offset headwinds from the uncertainty resulting from the lead up to the Brexit referendum as well as fiscal consolidation.

In contrast to other advanced economies, where currencies such as the yen and US dollar tended to strengthen, the UK pound depreciated 7 per cent between August and February, driven by concerns about a potential Brexit as well as expectations of normalisation of monetary policy.

The IMF has also downgraded global growth projections, to 3.4 per cent this year and 3.6 per cent in 2017 – 20 basis points lower than its prediction in October, but slightly up on 2015’s growth.

Brexit ranked seventh in a list of near-term risks to the world economy, behind instability in emerging economies, economic transition in China, strains in oil reliant countries, a reduction in confidence and growth, and geopolitical risks.

Brazil, currently embroiled in a major corruption scandal, saw the largest downgrade in its growth, forecast to contract 3.5 per cent compared to 2 per cent growth forecast in October.

However, the IMF said advanced economies had “partially reversed their swoon” from the first couple of weeks of the year, due to stablising oil prices, lower capital outflows from China and central bank policy.

The report says China’s transition towards more sustainable growth based on consumption and services would ultimately benefit China and the world, while warning there would be “bumps along the way”.