Brexit: British Economy is Slowing Down
DAVOS, SWITZERLAND - Jan 19, 2017: President of Ukraine Petro Poroshenko and the director of the International Monetary Fund Christine Lagarde during a meeting, in Davos, Photo by Drop of Light, Shutterstock.
IMF Downgrades UK’s Economic Growth Forecast
The International Monetary Fund (IMF) has downgraded the UK’s economic growth forecast after the British economy showed signs of slowing down. The IMF said the UK economy will possibly grow by 1.7% this year, 0.3% down from its April forecast. While the IMF’s forecast for 2018 remained unchanged at 1.5%, the 2017 downgrade is “the largest in any advance economy,” the Financial Times said.
For example, the outlook for eurozone economies is better than expected, with France, Germany, Italy and Spain having their forecasts revised up. The Euro area is expected to grow by 1.9% this year, up from 1.7%, showing evidence of "stronger momentum in domestic demand than previously anticipated.”
The fund releases its forecasts—a survey called the World Economic Outlook (WEO)—twice each year, in April and October, but offers updates in January and July. The July update was presented in Kuala Lumpur by Maurice Obstfeld, the IMF’s economic counsellor, who said that the stronger performance by the eurozone, China and Japan was offset by weaker performances in other countries. He pointed out that “From a global growth perspective, the most important downgrade is the United States.”
The IMF revised down its US outlook from 2.3% to 2.1%, as the US economy is likely to expand more slowly in 2017 than it has been predicted. President Donald Trump’s pledges to cut taxes and invest in infrastructure that would have boosted the US economy, now appear vacuous and impossible. "The major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of US fiscal policy changes. Market expectations of fiscal stimulus have also receded,” the IMF said.
The IMF had initially cut its 2017 forecast after the UK Referendum, but changed it to 2% when the UK showed strong economic data in the second half of 2016. However, this time, in the first quarter, the economy was weak with only a 0.2% growth, since inflation continued to rise and the pound remained weak affecting UK households’ living standards. A UK Treasury spokesperson said that the IMF forecast shows why it is so "vitally important" to get "the very best deal with the EU" after Brexit. He added that “Employment is at a record high and the deficit is down by three quarters, showing that the fundamentals of our economy are strong. We will continue to deliver greater prosperity and higher living standards for hard working people across the country.”
Maurice Obstfeld said: “Our projection for the United Kingdom this year is . . . lowered, based on the economy’s tepid performance so far. The ultimate impact of Brexit on the United Kingdom remains unclear.”
But some economists warn that the IMF forecasts might not be accurate. Lucy O'Carroll, chief economist of Aberdeen Asset Management explained that "The IMF, a multi-lateral institution, takes a step back and looks at a broad range of activities across the world, but they do sometimes get things wrong and we wouldn't want to put too much emphasis on what's been released today.”
What is the IMF?
After World War II, and in order to develop global economic prosperity, the International Monetary Fund and the World Bank were created at an international conference in Bretton Woods in New Hampshire, US. While the IMF provides immediate help to countries that cannot find sufficient funding anywhere else, the World Bank promotes long-term solutions for economic progress and reduction of poverty, especially implementing projects such as building schools and health centres, providing water and electricity and protecting the environment. Both institutions collaborate to help member countries and they have worked together to reduce external debt of poor countries under the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI).
The International Monetary Fund is an organisation established in 1944, governed by 189 countries from around the world and all cooperating to secure financial stability, international trade, employment and economic growth. The headquarters are in Washington D.C. and there are 24 directors representing a single country or a group of countries. The IMF Managing Director is Christine Lagarde.
The IMF’s employees come from all over the world and are accountable to the IMF and not their countries where they are citizens.
Where does the IMF’s loans come from?
IMF loans are offered by member countries through their payment of quotas. In order to join the IMF, a country is given an initial quota based on its global economic position. As the IMF article on quotas explains, “A member country’s quota determines its maximum financial commitment to the IMF, its voting power, and has a bearing on its access to IMF financing.” The quota subscriptions are the IMF’s main source of financing, but it can also borrow if any of its members’ needs demand it.
What does the IMF do?
The main purpose is to ensure the stability of the global monetary system by overseeing the global economy, lending to countries with problems relating to the balance of payments (BOP)—ways to monitor monetary transactions (both imports and exports) at a specific time period—and offering practical help to its member countries.
In terms of the IMF’s supervision, this takes place at the individual and global levels. The IMF detects risks to economic stability and offers advice on policy changes. As a lender, the IMF provides loans to its members which need to rebuild their international reserves, stabilise their economies, pay for imports and restore economic conditions for growth. It also helps to train and help member countries implement economic policies for boosting growth.
For example, the IMF’s biggest borrowers are Portugal, Greece, Ukraine and Pakistan. The IMF has agreed to a new bailout for Greece this July for $1.8bn.
Trump and Brexit
In the launching of the latest IMF report, Obstfeld clarified that Trump and Brexit remained important events because of the political uncertainty they have created and the “difficult-to-predict US regulatory and fiscal policies, negotiations of post-Brexit arrangements, or geopolitical risks.” Both Brexit and the Trump presidency, together with all the uncertain consequences that might ensue, could hurt confidence, slow down growth and discourage private investment.