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IMF expects global growth to weaken as Brexit clouds economic outlook

TheInternational Monetary Fund has cut its global economic outlook amidexpectations that the U.K.'s voteto leave the European Union will weigh on the world economy.

In itsJuly 19 World Economic Outlook, the fund revised its global growth forecast by0.1 percentage point to 3.1% in 2016 and to 3.4% in 2017, from 3.2% and 3.5%,respectively, in April.

MauriceObstfeld, the fund's economic counselor and director of the researchdepartment, said the IMF had initially prepared to upgrade its 2016 and 2017growth projections by 0.1 percentage point, after the first half of the yearhad shown stronger-than-expected growth in the euro area and Japan, as well asa partial recovery in commodity prices that helped several emerging anddeveloping economies.

However,he said, "Brexit has thrown a spanner in the works."

Inits report, the IMF said the U.K.'s surprise vote to leave the EU was thematerialization of an important downside risk for the world economy and, hence,has worsened the global growth outlook despite performance exceedingexpectations in the first half. Furthermore, it noted that the "sizableincrease in uncertainty," also on the political front, is set to take a tollon confidence and investment, including repercussions on financial conditionsand general market sentiment.

Inparticular, advanced European economies are expected to feel thesemacroeconomic consequences, while the IMF saw muted impact elsewhere. The euroarea's growth outlook for this year was upgraded by 0.1 percentage point to1.6% but cut by 0.2 percentage point to 1.4% in 2017. Projections for the U.K.were cut by 0.2 percentage point and 0.9 percentage point, respectively, nowanticipating 1.7% growth this year and 1.3% in 2017.

Despiteexpectations that uncertainty will gradually decline amid clarity around theexit process, the IMF flagged that there are downside risks to this baselinescenario and that more negative outcomes are a distinct possibility, especiallyif the U.K.'s negotiations on international trade relationships deliver more"disruptive" results than presently anticipated.

"[A]main reason we place less weight on these alternative scenarios, especially themore severe one, is that financial markets have proven resilient in the weeksafter the referendum, repricing in an orderly fashion to absorb the news,"Obstfeld stated. "This benign result owes importantly to the marketperception – and the reality – of major central banks' readiness to provideliquidity to markets. But vulnerabilities persist, not least in some ofEurope's banks."