Brexit, China, Zika and oil – how the IMF sees the global economy in 2016

The International Monetary Fund (IMF) has revised its outlook for global economic growth slightly downwards for 2016 and 2017 in the wake of Brexit, the first major indication of the toll that the uncertainty stirred up in Europe will take on the world economy.

Following a June referendum in which British voters opted to withdraw from the European Union, a move which startled financial markets, the IMF cut its “baseline” prediction for the world’s growth by 0.1 percentage points for both this year and next year.

This means the global economy is now predicted to grow by 3.1% in 2016 and 3.4% in 2017, with lacklustre performance in advanced economies offset by growth in emerging markets such as India. In the UK, the IMF cut its growth forecast by 0.2 percentage points to 1.7% for 2016, and by almost a full percentage point to 1.3% for 2017.

The IMF’s baseline forecast reflects a “benign assumption” that “arrangements between the European Union and United Kingdom settle so as to avoid a large increase in economic barriers,” with no major disruption to financial markets and limited political fallout. Should the UK fail to negotiate a so-called 'soft Brexit' ensuring continued access to the EU’s common market, the IMF outlines two bleaker scenarios for growth.

“From a macroeconomic perspective, the Brexit vote implies a substantial increase in economic, political and institutional uncertainty,” the report stated.

Beyond Europe, the IMF noted that declines in excess oil supply had helped to stabilise oil prices, while output growth in emerging markets and developing economies was somewhat better than expected.

In China, policy stimulus and strong infrastructure spending boosted indicators of economic activity in the first quarter, while there were “tentative signs of moderation in Brazil’s deep downturn and stabilization in Russia following the rebound in oil prices.” The IMF expects Brazil to weather a recession in 2016 and return to positive growth in 2017. The United States is predicted to grow by 1.8% in both 2016 and 2017, with India growing at 7.4% for both years.

Along with Brexit, other risks to the outlook include political divisions within advanced economies, geopolitical tensions, terrorism, climate change and diseases including the outbreak of the Zika virus in Latin America.

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