After Brexit IMF cuts forecast for Global Growth

The International Monetary Fund (IMF) cut its global growth forecasts on July 19 citing uncertainty over the economic effects of the recent Brexit vote which will see the UK leave the European Union (EU).

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Even before the Brexit vote, the IMF had cut its global growth outlook. The new forecasts represent the fifth time in the last 15 months that the IMF has cut forecasts of global economic growth. In its World Economic Outlook forecast the IMF now predicts global GDP to grow at 3.1 percent in 2016 and 3.4 percent in 2017 a decline of 0.1 percent for both years from the forecast in April.

While the IMF said that there had been recent improvements in Japan and the EU, and some recovery in commodity prices, that the Brexit vote increased uncertainty which took its toll on the investment outlook and consumer confidence. The chief IMF economist, Maury Obstfield, said that a day before the Brexit vote the IMF was ready to upgrade the 2016-17 growth projections slightly higher: "But Brexit has thrown a spanner in the works."

On the day before Britain's June 23 EU referendum, the IMF was "prepared to upgrade our 2016-17 global growth projections slightly," IMF chief economist Maury Obstfeld said in a statement. "But Brexit has thrown a spanner in the works." The IMF projected that the Brexit will slow global growth both this year and next.

The IMF projects the UK GDP to grow by 1.7 percent this year. This is down from the 1.9 percent it forecast in April. The forecast for 2017 is just 1.3 percent, down from 2.2 percent forecast in April. Of the 16 economies surveyed by the IMF, the reduction of 0.9 percent in the UK's 2017 forecast was only exceeded by that of Nigeria..

The Brexit was thought to have a negligible impact on the United States' economy. The IMF statement noted that the projections were made on the basis of a relatively benign settlement of the Brexit issue between the US and Europe, that presumes no major increase in economic barriers or further financial disruptions.

If there were severe disruptions as the negotiations hit snags, the UK-EU relationship would revert to World Trade Organization rules, and London could lose a significant portion of its financial services to the continental EU. If this were to happen, the UK would fall into recession and global growth would slow to 2.8 percent both in 2016 and 2017.

Under a mid-range scenario, with lower consumer confidence, and the UK losing some of its financial services sector to Europe, global growth would be 2.9 percent in 2016 and 3.1 percent in 2017. The recovery of the markets after the Brexit lead the IMF to choose the most benign model. A spokesperson for the UK Treasury said that while the Brexit vote represented a new phase for the UK economy, the focus would remain global: "Our absolute priority is to send a clear signal to businesses both here and across the world, that we are open for business and determined to keep Britain an attractive destination for investors from overseas."

The IMF outlook for China was relatively unchanged with a marginal improvement to 6.6 percent for 2016 but slowing to 6.2 percent in 2017. The recessions in Brazil and Russia are not as severe as previously thought, with both countries expected to return to positive growth in 2017 as commodity prices improve. The Fund urged countries to support demand and introduce structural reforms to help encourage growth.

IMF lowers global growth outlook

In its World Economic Outlook, the IMF claims that the global economic slowdown is getting worse. The organization also cut growth forecasts for the second time since last April.

The IMF report was issued ahead of its twice-yearly meeting. The meeting will be held in Tokyo later in the week. The IMF also warned that if the U.S. and Europe did not remedy their economic ills, this would prolong the slump. The U.S.will certainly not act until after the November election when the government will need to face the fiscal cliff. The fiscal cliff in the U.S. and the European debt crisis were flagged by the IMF as key issues that will impact the global economy.

Global growth, the report said, is too weak to bring down unemployment. What momentum exists comes mainly from central banks. No doubt this news will be greeted with great scepticism by U.S. Republicans, who blame Obama for high unemployment, and claim that the government cannot promote growth, only the private sector.

The report says:

"A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component.The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economic challenges."

The U.S. Treasury Secretary, Timothy Geithner, said that reforms in Europe "could take years to bear fruit". These reforms negatively impact pension benefits, wages, and the power of working people, and in the short term cause recessions. In the longer term, investors hope conditions emerge that are favorable for profitable investment again as labor costs are lowered and people's expectations are lowered as well.

Geithner told a meeting of business leaders:

"In these periods of time, where people were very worried about the risk of collapse in Europe, you saw an impact on financial markets and confidence that was very, very substantial. Europe still has a very hard road ahead of them."

Last week, Jim Flaherty, the Canadian Finance MInister had also warned that the European debt crisis was "a clear and present danger.

The IMF lowered its estimate of global growth for 2012 from 3.5% in July to 3.3% now. This will mark the slowest rate of growth since 2009 when the world was just beginning to recover from the financial crisis. The prediction for next year was also lowered from 3.9% in July to 3.6%.

U.S. growth was predicted to be slighly more than 2% both this year and next a much better performance than the euro area that was predicted to contract by .4% this year and grow only .2% next year.

The prospects for emerging markets are still relatively positive, although some are predicted to grow more slowly than predicted earlier. Estimates for India and Brazil are lowered considerably. Expectations were also cut for Chinese growth in 2012 and 2013. But chief IMF economist Olivier Blanchard warned about being overly pessimistic. He did not expect a hard landing in China, India, or Brazil, merely slowing growth. The future of the global economy remains murky, Beyond the fiscal cliff there seem to be other factors working against the expansion of global capital.

In China, Japanese businesses are feeling the effect of a strong nationalist reaction against Japanese claims to a few islands. In the U.S. congressional panels are raising security issues against Chinese telecom companies. These are all new factors that will impact international trade negatively. When times are tough, nationalist fervour is often the reaction and politicians take advantage of the situation to harvest votes.