Tom Ferris is a Consultant Economist specialising in Better Regulation. He was formerly the Department of Transport’s Senior Economist.
More on the IMF:
IMF says ‘Too slow for too long’ (Tom Ferris, 15 April 2016)
IMF keeps its sharp eye on the Irish Economy (Tom Ferris, 26 January 2016)
More on Brexit:
Ireland needs to make the most of Brexit (Tom Ferris, 30 June 2016)
Futures Trading: Brexit and All-Island Trade (Martin McTaggart, 3 June 2016)
Northern Ireland would suffer most from Brexit (PAI, 5 November 2015)
The International Monetary Fund (IMF) has cut its forecasts for global economic growth, as the United Kingdom vote to leave the European Union creates a wave of uncertainty.
The key conclusions of the IMF Report on the World Economic Outlook, published on 19 July last, are:
- Brexit causes “substantial” increase in economic, political, institutional uncertainty;
- Global forecast for 2017 cut by 0.1 percentage point, to 3.4%; and
- Global forecast would have been slightly higher, if not for Brexit.
The IMF Report recognises that with the implications of Brexit still emerging, it is still very difficult to quantify potential repercussions on the World Economy. As Maurice Obstfeld, IMF Chief Economist, put it:
“Brexit has thrown a spanner in the works…”
The outcome of the UK Referendum has introduced a significant downside risk for the world economy. As a result, the global outlook for next year has worsened. The deterioration reflects the expected macroeconomic consequences of a sizable increase in uncertainty, including on the political front. The IMF Report notes
“…uncertainty is projected to take a toll on confidence and investment, including through its repercussions on financial conditions and market sentiment more generally.”
Forecasting more difficult than usual
The IMF emphasises that following a Brexit, the extent of uncertainty complicates the already difficult task of macroeconomic forecasting. The baseline global growth forecast has been modestly revised down, relative to forecasts published last April – by a reduction of 0.1 percentage points for 2016 and 2017 (as compared to a 0.1 percentage point upward revision for 2017 envisaged pre-Brexit).
Brexit-related revisions are concentrated in advanced European economies, with a relatively muted impact elsewhere, including in the United States and China. Pending further clarity on the exit process, the IMF had to make assumptions about future developments. The key assumptions are:
- a gradual reduction in uncertainty going forward;
- arrangements between the European Union and the United Kingdom will avoid having a large increase in economic barriers;
- no major financial market disruption; and
- limited weaker U.S. growth.
Some would regard these assumptions as optimistic.
Alternative Scenarios for Global Economy
With the event still unfolding, it is very difficult to fully-quantify the potential repercussions of Brexit. It is evident that the vote in the UK in favour of leaving the European Union adds significant uncertainty to an already fragile global recovery. The impact and persistence of uncertainty are hard to quantify at this stage. The financial market reaction so far has been generally orderly and contained. However, global confidence effects and tighter financial conditions could affect global growth negatively, beyond what is envisaged in the baseline scenario.
To illustrate possible alternative outcomes, the IMF presented two scenarios for the global economy, labelled “Downside” and “Severe.” The scenarios are based on a structural model-based approach and judgment about the possible negative repercussions of Brexit on the global economy, including through a more severe financial market reaction than what has been observed so far.
“Downside” scenario: Under this scenario, it is assumed that financial conditions are tighter and that business and consumer confidence are lower than in the baseline, both in the United Kingdom and the rest of the world until the first half of 2017. This would negatively-affect consumption and investment relative to the baseline forecasts. Furthermore, a portion of UK financial services is assumed to gradually relocate to the euro area, taking a further toll on UK activity. The direct spill-over effects from the contraction of UK imports are negligible for global trade. In short, under the this scenario, the impact on global growth would be a further slowdown for the remainder of 2016 and 2017 relative to the baseline scenario.
“Severe” scenario: Under this scenario, the outcomes would be much more negative. This scenario envisages an intensification of financial stress, especially in advanced Europe, leading to a sharper tightening of financial conditions and larger confidence effects, in line with the “adverse scenario” outlined in the IMF’s 2016 United Kingdom Staff Report. It is assumed that negotiations between the United Kingdom and the European Union do not proceed smoothly and trade arrangements eventually revert to WTO rules. A larger portion of UK financial services is assumed to relocate to the euro area. This would reduce consumption and investment more markedly relative to the baseline and lead to a recession in the United Kingdom. In short, under this scenario, the global economy would experience a more significant slowdown for the remainder of 2016 and 2017. This would be more pronounced in advanced economies.
Some implications for Ireland
The IMF Report provides a context for continuing to plan a response to the unfolding implications of Brexit. The forecasts suggest that Ireland will have to work even harder to ensure increased levels of exports to our main markets – a point noted by the National Competitiveness Council, in a report published on 21 July. It warns that