IMF trims growth outlook, warns of Brexit risk | Business | Economy and finance news from a German perspective | DW | 12.04.2016

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IMF trims growth outlook, warns of Brexit risk

The International Monetary Fund (IMF) has pared back its global growth estimate for this year, warning of 'tangible risks' including rising protectionism and Britain leaving the EU as a result of a referendum in June.

Three days ahead of a joint meeting with the World Bank in Washington, the IMF on Tuesday lowered its growth forecast for 2016 from 3.4 percent to 3.2 percent.

In its quarterly World Economic Outlook report, the crisis lender noted that global economic expansion had been "too low for too long," and called for immediate action by the world's economic powers to shore up growth.

The IMF pointed to "intensifying financial and political risks" around the world, from volatile financial markets over the war in Syria to global warming, saying they had left the economy "increasingly fragile" and vulnerable to a turn toward recession.

Nationalism and Brexit concerns

Along with instability in China, volatile share prices and a loss of long-term growth potential in advanced economies, the IMF listed Britain's June 23 referendum on EU membership as a key risk for the global economy.

Noting that a likely exit of Britain from the EU - also known as Brexit - had already created uncertainty for investors, IMF chief economist Maurice Obstfeld said: "A Brexit could do severe regional and global damage by disrupting established trading relationships."

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Are the EU’s days numbered?

Moreover, the possibility of a Brexit, coupled with Europe's refugee crisis and attacks by Islamist militants, had resulted in a "rising tide of inward-looking nationalism," Obstfeld added. "Across Europe, the political consensus that once propelled the European project is fraying… A backlash against cross-border economic integration threatens to halt or even reverse the postwar trend of ever more open trade."

British Prime Minister David Cameron, who wants his country to remain in the European Union, agreed with that assessment. "The IMF is right. Leaving the EU would pose major risks for the UK economy. We are stronger, safer and better off in the European Union," he said in a tweet.

More gloom and doom

The IMF also singled out the violent swings in global financial markets as a specific threat to growth this year. Financial turmoil, it warned, was likely to impair confidence and demand growth, which could become a "self-confirming negative feedback loop."

The result of "two distinct rounds of global financial turbulence" recently, said Maurice Obstfeld, was capital flight from riskier assets and economies, higher borrowing costs for developing countries, and continued weakness in commodity prices. More such volatility could feed through to the broader economy, adding stress in particular to the most vulnerable countries, he noted.

Against this background, the IMF sees contractions in large emerging market economies, most notably Brazil. In addition, it lowered forecasts for Japan, oil-dependent Russia and Nigeria. Growth expectations for most leading economies were pared back by 0.2 percentage points, with the United States experiencing slower expansion of just 2.4 percent, compared with the IMF's estimate of 2.6 percent in January.

Chinese coal workers

As China's economy is transforming, thousands of coal and steel workers in state-owned companies will be made redundant. In addition, China's lower demand for commodities has hurt revenues of oil- and minerals-exporting emerging economies.

The Chinese economy is still on track for a significant slowdown from last year, although the IMF slightly upgraded its growth estimate to 6.5 percent for 2016. However, the crisis lender sees the weakness in the world's second largest economy continuing into 2017, when China is expected to grow at a rate of just 5.2 percent.

Action to avert recession

If not addressed, the looming risks could take the world economy in the direction of recession, the IMF warned in the report.

"The weaker is growth, the greater the chance that the preceding risks, if some materialize, pull the world economy below stalling speed," the IMF chief economist warned. "In brief: lower growth means less room for error."

He called for an "immediate, proactive response" by governments to ensure the slowdown does not worsen, saying policymakers shouldn't ignore the need to prepare for "possible adverse outcomes."

In particular, #link:19164239:the IMF urged governments to invest' wherever possible to support growth, for instance in infrastructure and in research and development. In addition, tax reforms and other structural approaches could pay off in terms of greater investment, job creation and demand creation, it added.

uhe/kd (Reuters, dpa, AFP)

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