The International Monetary Fund (IMF) and the European Commission have revised downward their expectations for economic growth given the Leave vote in the UK’s EU referendum last month.
The IMF said the global outlook for economic growth had worsened as a result of the outcome of the referendum, despite better-than-expected performance earlier this year.
Maurice Obstfeld, chief economist and economic counsellor at the IMF, said “Brexit has thrown a spanner in the works”.
The IMF now expects global growth of 3.1% and 3.4% for 2016 and 2017, respectively, down 0.1 percentage point from its baseline global growth forecasts for 2016 and 2017 in April.
This masks geographical differences, however, with the outlook worse for advanced economies, in particular the UK, and broadly unchanged for emerging market and developing economies.
The IMF downgraded its expectations for growth mainly to reflect the macroeconomic consequences of “a sizeable increase in uncertainty”, including in the political realm.
“This uncertainty is projected to take a toll on confidence and investment, including through its repercussions on financial conditions and market sentiment more generally,” it said.
“The initial financial market reaction was severe but generally orderly.”
It noted that, as of mid-July, sterling was around 10% weaker despite recovering somewhat, equity prices were lower in some sectors, especially European banks, and that yields on safe-haven assets had fallen.
Economic growth in the UK will fall by 0.2 percentage points for 2016 and close to 1 percentage point next year, according to the IMF, as increased uncertainty is “projected to significantly weaken domestic demand relative to previous forecasts”.
The IMF qualified its update to its world economic outlook by noting that, “[w]ith ‘Brexit’ still very much unfolding, the extent of uncertainty complicates the already difficult task of macroeconomic forecasting”.
Maurice Obstfeld, IMF chief economist: “Brexit has thrown a spanner in the works”
Its new baseline forecasts are based on the assumption of a gradual reduction in uncertainty, Brexit negotiations between the EU and the UK avoiding a large increase in economic barriers, no major financial market disruption, and limited political fallout from the referendum.
But more negative outcomes are “a distinct possibility,” according to the IMF.
Obstfeld said: “The real effects of Brexit will play out gradually over time, 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.”
‘Extraordinarily uncertain situation’
The European Commission, meanwhile, also expects that the uncertainty resulting from the UK vote will curtail economic growth, for the UK and for the EU.
“The referendum has created an extraordinarily uncertain situation,” it said.
“Due to the lack of information about the new equilibrium after the UK’s exit, many elements have not yet entered the assessment but nevertheless constitute substantial risks to the outlook.”
It said that, before the EU referendum in the UK, GDP growth in the euro area would have been expected to reach 1.7% in 2016 and 2017.
It recently revised this outlook to reflect expectations of slower private consumption and investment, and impacts on foreign trade.
Based on the results of scenario analyses, the Commission now expects euro-zone growth of 1.5-1.6% in 2016, and 1.3-1.5% in 2017.
This, noted the Commission, implies a loss of GDP of 0.25% to 0.5% by 2017.
This compares with expectations of a 1-2.75% drop in economic growth in the UK by then, according to the Commission.
Given the extent of unknowns about the situation after the UK exits the EU, it said, “the adjustment path is impossible to specify”.
“This implies the uncertainty shock could evolve quite differently in terms of dimension and duration,” it said.
Its revised outlook concerns the near-term impact of the referendum.