By David Lawder
WASHINGTON (Reuters) – The International Monetary Fund (IMF) cut its global growth forecasts for the next two years on Tuesday, citing uncertainty over Britain’s looming exit from the European Union.
The move included a nearly full percentage-point reduction in the UK’s 2017 growth forecast.
Cutting its World Economic Outlook forecasts for the fifth time in 15 months, the IMF said that it now expects global GDP to grow at 3.1 percent in 2016 and at 3.4 percent in 2017 — down 0.1 percentage point for each year from estimates issued in April.
The Fund said that despite recent improvements in Japan and Europe and a partial recovery in commodity prices, the UK’s Brexit vote had created a “sizeable increase in uncertainty” that would take its toll on investment and market and consumer confidence.
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 said that the impact will hit hardest in Britain itself, where the institution cut its 2016 growth forecast to 1.7 percent, down 0.2 percentage points from its April forecast. It cut the 2017 UK forecast more sharply, by 0.9 percentage points, to 1.3 percent.
The IMF lifted its euro zone forecast slightly for 2016, but cut its 2017 outlook by 0.2 percentage point to 1.4 percent for 2017.
It said last week that Brexit would have a “negligible” impact on the United States.
The IMF noted that its latest forecasts were made under relatively benign assumptions of a settlement between the EU and Britain that leads to limited political fallout, avoids a major increase in economic barriers and prompts no major further financial market disruptions.
But the Fund also modeled other scenarios, including a “severe” one in which the divorce negotiations go badly, financial stress intensifies, the UK-EU trading relationship reverts to World Trade Organization rules, and London loses a large portion of its financial services sector to continental Europe.
Under that scenario, Britain would fall into recession and global growth would slow to 2.8 percent in both 2016 and 2017, the IMF said.
A middle scenario labeled “downside” would see tighter financial conditions and lower consumer confidence than the baseline, with the UK losing some of its financial services sector to Europe. It shows global growth at 2.9 percent in 2016 and 3.1 percent in 2017.
Obstfeld said that the financial market recovery following the initial Brexit shock helped persuade the IMF to go with the most benign of the three scenarios.
Responding to the IMF’s report, a UK Treasury spokeswoman said that the Brexit vote marks a “new phase” for Britain’s economy, but the country would remain globally focused.
“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 spokeswoman said in a statement.
The IMF said China’s outlook was largely unchanged, with a slight improvement to 6.6 percent seen in 2016, but still slowing to 6.2 percent in 2017.
Recessions in Brazil and Russia will be less severe than previously forecast this year due partly to some recovery in oil and commodities prices, the IMF said, adding that both countries will return to positive growth in 2017.
The Fund urged policymakers not to accept the tepid growth rates as a “new normal,” and said that they should support demand in the near-term and structural reforms to aid medium-term growth.
The IMF said it had been prepared to raise Japan’s 2017 growth outlook by 0.4 percentage points after the delay of a consumption tax hike next spring, but this has been cut in half by the continued rise in the yen’s value.
It now expects 2016 growth of 0.3 percent compared with 0.5 percent previously, while 2017 growth will be barely in positive territory at 0.1 percent.
(Reporting by David Lawder; Editing by Kim Coghill)