IMF Cuts 2016 Global Economic Growth Outlook After Brexit Vote
Uncertainty caused by U.K. referendum takes toll on confidence, investment
The IMF notched down its global growth estimate for this year and next by 0.1 percentage point, putting 2016 at 3.1% and on par with last year’s pace, the slowest since the financial crisis. The fund expects a mild pickup next year to 3.4% annual growth.
But it warned that a host of threats—including geopolitical turmoil, rising protectionism and terrorist attacks—could push growth into a deeper rut. Meanwhile, central banks appear to be running out of options to juice output, reflected in part by bonds yields plumbing new depths around the world. Many emerging markets are still struggling to cope with China’s deceleration and the long-term slump in trade and commodity prices.
The IMF’s latest World Economic Outlook sets the tone for a meeting of the world’s top finance ministers and central bankers later this week in China. Officials from the Group of 20 leading advanced and developing economies will call on each other to deliver on long-promised policies meant to spur growth.
“Continued uncertainty in the global outlook underscores the importance of all countries using all policy tools—monetary, fiscal and structural—in combination to boost growth,” the U.S. official said.
Though many markets have stabilized after a post-Brexit selloff, the IMF warned the vote’s impacts will likely play out over time. The IMF cut prospects for eurozone growth next year across the board, including 0.9 percentage point for the U.K. to 1.3% and 0.4 percentage point for Germany to 1.2%.
But the fund’s current outlook is based on a “benign assumption” that the U.K. and the EU preserve much of their key trade, finance and economic relationship.
That is by no means assured, however, due to the lack of clarity about the U.K.’s ultimate relationship with the EU. “More negative outcomes are a distinct possibility,” fund economists warned in the report.
A prolonged and acrimonious negotiation could drag down global economic growth to 2.8% this year and next, the IMF said. Brexit has already drawn new attention to Europe’s legacy banking weaknesses, with some officials warning the financial system could face another full-blown crisis.
“This overlay of extra uncertainty, in turn, may open the door to an amplified response of financial markets to negative shocks,” Mr. Obstfeld said.
Fund economists said policy makers need to “stand ready to act more aggressively and cooperatively should the impact of financial market turbulence and higher uncertainty threaten to materially weaken the global outlook.”
The fund also trimmed its forecast for U.S. growth this year by 0.2 percentage point to 2.2% on the back of a weaker-than expected first quarter as a strong dollar and souring energy sector hit the economy.
Brexit added to Japan’s exchange-rate headaches as capital fleeing London sought refuge in the yen, one of the world’s safe-haven currencies. Instead of a planned upward revision for the world’s third-largest economy, a stronger yen forced the IMF to cut the country’s growth prospects for this year by 0.2 percentage point to a measly rate of 0.3% this year. Tokyo’s decision to delay a consumption tax increase means the country will avoid a recession. But the economy is only expected to expand by 0.1% next year.
Africa’s largest economy, Nigeria, took the largest revision as plummeting oil prices, production cuts, power outages and souring investor confidence took their toll on the nation. The fund cut its forecast by 4.1 percentage points for 2016 and 2.4 percentage points for 2017, putting the economy in a 1.8% contraction this year and a mild 1.1% expansion next year.
While the overall outlook is gloomy, the IMF cited a few bright spots in the global economy such as market resilience in the face of the surprise Brexit vote. The fund also raised its forecasts for Brazil and Russia, projecting the two commodity exporters will pull out of deep recessions next year.