Global growth revised down in light of Brexit vote

3 Aug 16

Economic growth next year will be lower than expected, due largely to the UK’s decision to leave the European Union, according to the National Institute of Economic and Social Research.

Global growth is now expected to be 3.3% in 2017, down from the NIESR’s previous estimate of 3.5%. However, growth for 2016 is set to remain in line with expectations at 3%.  

The institute also revised down the predicted growth rate for the eurozone from 1.7% to 1.3% for 2017. This was due to several factors, including the weakness of banks in the region, particularly in Italy, after the repeated economic shocks of recent years. 

This echoed the results of the ‘stress test’ conducted by the European Banking Authority last Friday, which put Italy's Banca Monte dei Paschi di Siena Spa at the bottom of the table of banks most able to withstand economic shocks.

The NIESR’s downward revisions for Europe were only partially offset by upward revisions to growth in Brazil, Japan and Russia, while India is likely to remain the fastest growing major economy. The US, meanwhile, is anticipated to grow by 2.3% in 2017. 

Meanwhile, the rate of inflation in many OECD economies was likely to undershoot targets laid out by central banks for 2017. But the European Central Bank “stood ready” to ease monetary conditions, and the Federal Reserve of the United States was, it said, poised to gradually increase interest rates.

However, given current record low government bond yields, the institute said it was not clear how far this further stimulus would reach. “We expect central banks to be very cautious about introducing significantly negative policy rates because of concerns about the impact on the financial sector,” it said.

The limited scope for further monetary stimulus, however, made the case for fiscal support even stronger.

The analysis provided by the institute is based on the assumption that the UK would strike a trade agreement with the EU trading bloc along the lines of Switzerland. This would allow the UK free access to goods markets, but limited access to service markets. The consequences of this on the financial services sector in the region were likely to be adverse, and may initiate a “Balkanisation of EU wholesale finance.”

Angus Armstrong, director of macroeconomics at the NIESR, said: “Rejoining EFTA (European Free Trade Association)… would result in less economic integration with the EU and so lower productivity and output over the medium term. The critical issue is whether the UK can strike deep trade deals with [its] trading partners elsewhere.” 

This might involve joining the Trans-Pacific Partnership deal or the Transatlantic Trade and Investment Partnership, he said, but both faced significant challenges due to “a lack of popular support”.

More generally, the institute noted growth in trade restrictions. For example, the ratification of the TPP deal, agreed earlier this year, faces headwinds and should it fail, “the environment for striking meaningful trade deals will be even more challenging.”   

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