Projected growth for emerging and developing Asia for 2016-2017 remains largely the same, although the global prediction has been reduced slightly in the wake of Brexit, according to the latest projections of the International Monetary Fund (IMF).
The Fund cut its forecasts for global economic growth this year and the next as the unexpected UK vote to leave the European Union creates a wave of uncertainty amid already fragile business and consumer confidence.
“The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies,” according to the IMF’s “World Economic Outlook Update.”
“Brexit has thrown a spanner in the works,” said Maurice Obstfeld, IMF chief economist and economic counselor. And with the event still unfolding, the report said it is still very difficult to quantify potential repercussions.
The global economy is projected to expand 3.1% this year and 3.4% in 2017, according to the IMF. Those forecasts represent a 0.1 percentage point reduction for both years relative to the organization’s April “World Economic Outlook.”
But for emerging and developing Asia, the earlier growth forecast of 6.4% for 2016 and 6.3% for 2017 remains in place.
China’s growth forecast for 2016 is up 0.1 percentage point, to 6.6%, and is unchanged for 2017 at 6.2%. Brexit fallout is likely to be muted for China, the world’s second largest economy, because of its limited trade and financial links with the U.K.
“However, should growth in the European Union be affected significantly, the adverse effect on China could be material,” the IMF said.
In India, economic activity remains buoyant, but the growth forecast for 2016-17 has been pruned slightly, by 0.1%, from the earlier 7.4% for both 2016 and 2017, reflecting a more sluggish investment recovery.
The ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, Vietnam), meanwhile, is holding steady, with growth still pegged at 4.8% and 5.1% for 2016 and 2017, respectively.
Among the advanced economies, the UK and Europe will be hit the hardest by fallout from the June 23 referendum, which prompted a change of government in Britain.
The UK economy will expand 1.7% this year, the IMF said, 0.2 percentage point less than forecast in April. Next year, the nation’s growth will slow to 1.3%, down 0.9 point from the April estimate and the biggest reduction among advanced economies. For the euro area, the Fund raised its forecast by 0.1 point this year, to 1.6%, and lowered it by 0.2 point in 2017, to 1.4%.
Brexit’s fallout is likely to be felt in Japan, where a stronger yen will limit growth. The IMF cut its 2016 growth forecast by 0.2 percentage point, to 0.3%. Next year, Japan’s economy, the world’s third largest, is expected to expand 0.1%, 0.2 percentage point more than predicted in April, due to postponement of the consumption tax increase.
In the U.S., weaker-than-expected growth in the first quarter prompted the IMF to reduce its 2016 forecast to a gain of 2.2%, 0.2 percentage point less than the April outlook. The IMF left its 2017 forecast for U.S. growth unchanged at 2.5%.
Had it not been for Brexit, the IMF said, it was prepared to leave its outlook for this year broadly unchanged as better-than-expected euro area performance offset disappointing U.S. first-quarter growth. The IMF also had been prepared to raise its outlook for 2017 slightly, by 0.1 percentage point, on the back of improved performance in a few big emerging markets, in particular Brazil and Russia.
The IMF said its forecasts were contingent on the “benign” assumptions that uncertainty following the UK referendum would gradually wane, the EU and UK would manage to avoid a large increase in economic barriers, and that financial market fallout would be limited.
Even so, the IMF warned that “more negative outcomes are a distinct possibility.” “The real effects of Brexit will play out gradually over time, adding elements of economic and political uncertainty,” said Obstfeld. “This overlay of extra uncertainty, in turn, may open the door to an amplified response of financial markets to negative shocks.”
The IMF cited other risks to its outlook, which could be further exacerbated by Brexit, such as “unresolved legacy issues in the European banking system, in particular in Italian and Portuguese banks.”
The Fund also warned that “political divisions within advanced economies may hamper efforts to tackle long-standing structural challenges and the refugee problem” and that “a shift toward protectionist policies is a distinct threat.”
Geopolitical tensions and terrorism are also taking a heavy toll on the outlook in several economies, especially in the Middle East, with further cross border ramifications.
Photo: RudolfSimon
