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 3.2 percent projection and equal to growth in 2015, according to the fund’s quarterly World Economic Outlook, released Tuesday in Washington. The 2017 forecast was cut to 3.4 percent from 3.5 percent.
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 2.8 percent 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 Tuesday.
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 1.7 percent this year, down from a projection of 1.9 percent in April. The fund cut its forecast for British growth in 2017 by 0.9 percentage point to 1.3 percent.
The IMF said the impact of Brexit will be concentrated in advanced European economies, with a muted effect on other countries, including the U.S. and China.
Market reaction was initially “severe but generally orderly” to the Brexit referendum June 23, the IMF said. The pound has dropped about 12 percent against the dollar since the vote, while demand has strengthened for safe haven assets such as U.S. 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 U.S. economy to expand 2.2 percent this year and a projection from earlier this month for 1.6 percent growth in the euro area.
The fund sees the Japanese economy growing 0.3 percent this year, down 0.2 percentage point 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 6.6 percent, noting that the nation’s near-term outlook has improved on recent stimulus measures.
The fund improved its outlook for both Brazil and Russia, though both economies are still expected to contract this year. The IMF downgraded its forecast sharply for Nigeria, Africa’s largest economy, as it struggles with foreign-currency shortages due partly to lower oil revenues. Nigeria’s economy will shrink 1.8 percent this year, the IMF said, compared with an April forecast for a 2.3 percent expansion.
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, Obstfeld urged policy makers 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 postwar era,” Obstfeld said. It’s up to policy makers and political leaders “to offer a narrative about these long-term developments to counter those popular ones that blame all ills on globally oriented markets.”