The International Monetary Fund's current outlook is based on a benign assumption that U.K.-EU negotiations go smoothly
The International Monetary Fund trimmed its outlook for the global economy on Tuesday, citing Britain’s decision to leave the European Union. But the fund warned Brexit could make the outlook far worse. Here’s how.
The Brexit referendum already roiled markets and is weighing on consumer sentiment and investor confidence. That’s the central reason the IMF cut its growth projection by 0.1 percentage point this year and next.
An acrimonious and drawn-out negotiation between the U.K. and the EU could fuel further uncertainty about the future of the political, trade and finance relationship. And it’s not clear when the negotiations will start in earnest, nor is there clarity on the direction.
Under the IMF’s “downside” scenario, financial conditions tighten while business and consumer confidence fall more than expected in the baseline. That undermines consumption and investment. A portion of the U.K.’s hefty financial services industry moves out of London onto the continent.
The fund’s less probable, but more “severe” scenario imagines the financial stress ripping through Europe, leading to a sharp tightening of financial conditions and larger confidence effects.
Negotiations between the U.K. and Europe are troubled and the trade relationship reverts back to basic WTO tariff rules. More of London’s financial industry moves offshore, pitching the U.K. economy into recession....MORE