Brexit prompts IMF to downgrade global growth forecasts

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The IMF has forecast that global GDP will drop 0.1 percentage points due to Brexit in both 2016 and 2017 with the potential for significantly more impact if some current assumptions worsen.

In its World Economic Outlook Update the economic organisation forecast GDP would now drop to 3.1 per cent this year and 3.4 per cent in 2017.

But it warned “more negative outcomes are a distinct possibility” and could lead to global GDP dropping below 3 per cent for both years.

“Brexit has thrown a spanner in the works,” said Maurice Obstfeld, IMF chief economist and economic counsellor.

Obstfeld says the effects of Brexit would play out gradually “adding elements of economic and political uncertainty.”

“This overlay of extra uncertainty, in turn, may open the door to an amplified response of financial markets to negative shocks.”

The report forecasts UK GDP will reach 1.7 per cent this year, 0.2 percentage points less than forecast in April. The biggest reduction will be seen in 2017, when the nation’s growth will slow to 1.3 per cent, according to the IMF’s forecasts, down 0.9 percentage points from April.

For the eurozone area the IMF raised its forecast by 0.1 percentage points to 1.6 per cent, due to better than expected growth, but lowered it 0.2 percentage points to 1.4 per cent in 2017.

With events related to Brexit still unfolding, the IMF says it is difficult to quantify potential repercussions, and outlined two scenarios if more negative outcomes resulted from the UK’s vote to leave the European referendum.

In the “downside” scenario, a portion of UK financial services migrate to the euro area and financial conditions are tighter and consumer confidence weaker than currently assumed.

In the “severe” scenario, trade agreements between the EU and the UK revert to World Trade Organisation norms and economies would face intensified financial stress, particularly in Europe.

Beyond Europe, the IMF says the US and China would be largely unaffected by Brexit, however, fallout was likely to be felt in Japan where a stronger yen would limit growth.

The IMF cut Japan’s 2016 forecast to 0.3 per cent, down 0.2 percentage points. The postponement of consumption tax increases means the world’s third-largest economy would expand 0.1 per cent in 2017, 0.2 percentage points higher than predicted in April.

US growth would remain unchanged in 2017 at 2.5 per cent, while China’s would also remain unchanged at 6.2 per cent.