The International Monetary Fund has slashed its forecasts for UK growth, becoming the first official economics body to revise its growth estimates heavily downward in the wake of the shock Brexit vote last month.
The IMF now says it expects the UK GDP to grow by 1.7 per cent this year, down from the 1.9 per cent it forecast in April, and the forecast for 2017 is just 1.3 per cent, down from 2.2 per cent previously.
“The increase in uncertainty following the referendum is projected to significantly weaken domestic demand relative to previous forecasts” the IMF said in its latest World Economic Outlook.
Major UK downgrade
But the Fund added that “with the event still unfolding, it is very difficult to quantify its potential repercussions” for the wider world.
For now, the IMF has revised down its global growth forecast for this year and next by a relatively modest 0.1 per cent, seeing international GDP growth of 3.1 per cent in 2016 and 3.4 per cent in 2017.
But the Fund also modelled two other possible post-Brexit scenarios for the world economy labelled “downside” and “severe”, which suggest global growth in 2016 and 2017 could dip as low as 2.8 per cent.
This would be the most severe hit to the global economy since the global financial crisis in 2009, when international GDP growth fell to zero.
Brexit's potential impact on the world
“Brexit has thrown as spanner in the works” said the IMF chief economic counsellor Maury Obstefeld, adding that before the Brexit vote on 23 June the Fund had been preparing to upgrade its global growth forecasts.
“While our modestly reduced central scenario is the most likely outcome in our judgment, there are other, downside possibilities with substantially lower growth in Europe and palpable spillovers outside” Mr Obstfeld warned.
The IMF said its “severe” scenario would materialise if Brexit inflicted major damage on global trade and also set off a new phase of the eurozone financial crisis.
But in an optimistic note Mr Obstfeld noted that “financial markets have proven resilient in the weeks after the referendum, repricing in an orderly fashion to absorb the news”.
Sterling has fallen more than 10 per cent against the dollar since 23 June to its lowest level since 1985 but global equity markets have largely shrugged off the impact.
The IMF forecast is considerably less severe than that of the Treasury’s short-term forecast of Brexit's impact made before the referendum vote.
This projected UK GDP to contract in every quarter until the second half of 2017 in the wake of Brexit, returning the UK to recession for the first time since 2009.
But the IMF’s view today is similar to the pre-Brexit forecast made by the OECD, which said that in the event of a Leave vote UK GDP growth could be lower by 0.5 per cent in 2017 and 2018 and down by 1.5 in 2019.
The Bank of England will deliver its own upgraded GDP and inflation forecasts early next month in its August Inflation Report, when the Monetary Policy Committee is also widely expected to cut interest rates to support the economy.
The Office for Budget Responsibility, the Treasury’s independent watchdog, will produce its own much-anticipated forecasts at the time of the new Chancellor’s next Autumn Statement.
A number of private sector economic forecasters working for banks and fund managers have made predictions that the UK is set to return to recession this year or next year because of Brexit.
A Treasury spokesperson said, in response to the IMF downgrades, that "we are the same outward-looking, globally-minded, big-thinking country we have always been."
“As the Chancellor has said, 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 and attractive destination for investors from overseas. We are stronger than we were in 2010 and well-placed to rise to the challenges ahead.”
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