IMF lowers its growth forecast only marginally but points to considerable risks

The International Monetary Fund (IMF) recently made a slight downward revision to its growth forecast for the global economy in its annual July update. According to the latest IMF forecast, global output will accelerate at the same pace this year as last year, by an average 3.1 percent. Next year, the Washington-based institution expects the pace to accelerate somewhat more strongly to 3.4 percent which would then bring it in line with the year 2014. The main reason for the slightly subdued growth outlook is the British vote to leave the European Union. According to this base scenario, the fallout for the global economy and above all for the industrialized countries will only be „very“ limited, and can even be expected to have hardly any statistical impact.

It would almost seem as though the forthcoming Brexit posed no real risk to the global economy at all, with the IMF offering two risk scenarios in its press statement at least in graphic form. In the less-severe risk scenario, the global economy will only accelerate at half the pace in 2017 as in the base scenario. In the second, severe scenario of an economic crisis, which would primarily impact the industrialized countries, with Europe experiencing the greatest fallout, economic momentum will already visibly decelerate this year and remain below the 3 percent mark next year. Weaker economic growth was last reported in 2009, when the great financial and economic crisis was at its low point. No potential causes for these more downbeat scenarios are named, with only the more „severe“ outlook labelled as less likely.

The question is to what extent the latest IMF forecasts differ from our forecasts which we had revised downwards directly after the referendum. According to our estimate, global economic expansion will fail to reach that of the previous year; however, this had already been our estimate before the Brexit vote, even if the deceleration is now likely to be somewhat stronger. What the IMF is saying is that growth in 2016 will be as strong as in 2015 due to the absence of growth deceleration in the industrialized countries.

Next year – similar to the IMF in its base forecast – we expect the global economy to accelerate more strongly again because the upswing in the developing countries is likely to further intensify. However, we take a more sceptical view towards developments in the industrialized countries than the IMF, and expect the global economy to expand only marginally at the pace of 2015 and continue trailing behind that of 2014. As far as can be judged from the IMF’s charts, the DZ BANK forecast thus corresponds with the less-serious risk scenario of the IMF. We believe that it is important not to underestimate the negative burdens on investment activity in Great Britain as well as among its closest trading partners. In fact our concerns go even further: the decelerating impact on global trade will not only adversely affect the economy in the Euro area but will also impact that of the United States, for example. After all, one fifth of US exports goes to the European Union. Unlike the Washington-based IMF, we expect the economy in the USA to remain unchanged in 2017 at only two percent, thus corresponding with this year’s rate of expansion.

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