IMF scraps forecast for growth pick-up
THE International Monetary Fund scrapped its forecast for a pickup in global growth this year, citing Britain’s vote to leave the European Union, and warned the damage could worsen if confidence falters among investors and companies.
The IMF sees global gross domestic product rising 3.1 percent this year, down from April’s 3.2pc projection and equal to growth in 2015, according to the fund’s quarterly World Economic Outlook, released on July 19 in Washington. The 2017 forecast was cut to 3.4pc from 3.5pc.
The IMF’s new forecast is based on the assumption that British and EU officials reach new trade agreements that avoid a “large increase in economic barriers”.
However, if talks break down, Britain will slip into recession as more financial institutions relocate to the euro area and consumption and investment contract more than expected, the Fund said. In a “severe” scenario, global growth is seen sliding to 2.8pc this year and next.
“The real effects of Brexit will play out gradually over time, adding elements of economic and political uncertainty that could be resolved only after many months,” IMF chief economist Maurice Obstfeld said in the text of remarks for a press briefing on July 19.
The Washington-based fund said it had planned to modestly upgrade its global outlook before the Brexit vote, as activity in China came in stronger than expected and recessions in Brazil and Russia turned out less severe than anticipated. Instead, the IMF cut its 2016 global forecast for a fourth time.
As it stands, the IMF still expects the British economy to grow 1.7pc this year, down from a projection of 1.9pc in April. The fund cut its forecast for British growth in 2017 by 0.9 percentage point to 1.3pc.
The IMF said the impact of Brexit will be concentrated in advanced European economies, with a muted effect on other countries, including the United States and China.
Market reaction was initially “severe but generally orderly” to the Brexit referendum June 23, the IMF said. The pound has dropped about 12pc against the dollar since the vote, while demand has strengthened for safe haven assets such as US Treasuries. But global stock markets have largely recovered after an initial selloff, with the S&P 500 surging to a record high.
The IMF reiterated a June forecast for the US economy to expand 2.2pc this year and a projection from earlier this month for 1.6pc growth in the euro area. The Fund sees the Japanese economy growing 0.3pc this year, down 0.2 percentage points from April’s projection, as the appreciation of the yen wipes out the benefits of a delay in increasing the nation’s consumption tax.
The IMF raised its forecast for growth in China this year by 0.1 percentage point to 6.6pc, noting that the nation’s near-term outlook has improved on recent stimulus measures.
Mr Obstfeld said a decline in global potential output brought about by demographic and technological trends could set off a “vicious circle” of weakening demand and slipping economic potential. Slow growth will worsen the social tensions caused by trends such as long-term wage stagnation, he said.
Without mentioning the names of political candidates or specifying any election campaigns, Mr Obstfeld urged policymakers and political leaders to lean against “popular” rants against global markets.
“These stresses are contributing to demands for inward-looking solutions that seek to reverse long-term global trends at the expense of the open, dynamic markets that have delivered worldwide growth throughout most of the post-war era,” Mr Obstfeld said.