The International Monetary Fund reduced its forecast for global growth in 2016 to 3.1%, and cut U.S. growth expectations by 0.2 percentage points to 2.2%, due to the uncertainty caused by the U.K. vote to leave the European Union.
The global growth forecast is down from 3.2% for 2016, while for 2017 the growth forecast was also cut, to 3.4% from 3.5%, said the latest World Economic Outlook Update, published Tuesday. The previous forecasts were outlined in the IMF's April update.
“From a macroeconomic perspective, the Brexit vote implies a substantial increase in economic, political and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies,” said the update.
While it is too early to quantify the potential repercussions, the IMF did warn of two potential scenarios that could reduce world growth to less than 3% in the next two years. A downside scenario would mean tighter financial conditions and weaker consumer confidence than already assumed. A severe situation would see intensified financial stress and a reversion to World Trade Organization norms for trade arrangements between the U.K. and the EU.
The U.S. outlook was cut not only due to the knock-on effects of Brexit, but also lower than expected growth in the first three months of 2016. The IMF left the 2017 growth forecast unchanged at 2.5%.
U.K. growth in 2016 was updated to 1.7%, down from 1.9% in April's outlook. For 2017, the growth forecast was cut to 1.3%, down 0.9 percentage points from 2.2%. This was the biggest cut in growth forecast among the advanced economies.
By contrast, the eurozone’s growth forecast was revised upward for 2016, by 0.1 percentage points to 1.6%. The IMF said in its report that growth was higher than expected in the first quarter of 2016, reflecting strong domestic demand. Growth was cut to 1.4% for 2017, down from 1.6%.
Japan is expected to grow 0.3%, down from 0.5% this year; while it is expected to expand 0.1% in 2017, up 0.2 percentage points, due to the postponement of the consumption tax increase. China is set to grow 6.6%, up from 6.5% in the April outlook update, and remains at 6.2% for 2017, largely due to its limited trade and financial links with the U.K.
Jack Lejk contributed to this story.