A no-deal Brexit ranks alongside US trade policy as one of the chief threats to the world economy, according to the IMF’s latest assessment of the outlook for global growth.
In an update of its World Economic Outlook, published on Tuesday, the fund was slightly more pessimistic than it had been in April on prospects for this year and next, forecasting that global growth would slow to 3.2 per cent in 2019 — the weakest rate of expansion for a decade — before picking up to 3.5 per cent in 2020.
The projected pick-up was “precarious”, the IMF said, relying on progress in resolving differences over trade policy, as well as a stabilisation in troubled economies such as Turkey and Argentina.
It listed a no-deal Brexit as one of the main events that could throw the global economy off-course.
This is seen as an increasingly plausible outcome, as Boris Johnson, who is set to become Britain’s new prime minister on Wednesday, has ruled out compromise on the terms of withdrawal, and pledged to leave the EU on October 31 “deal or no deal”.
“The principal risk factor to the global economy is that adverse developments — including further US-China tariffs, US auto tariffs or a no-deal Brexit — sap confidence, weaken investment, dislocate local supply chains and severely slow global growth below the baseline,” the IMF said.
To place growth on a stronger footing, it would be vital to resolve uncertainty around trade agreements, the fund added — including between the UK and EU, as well as the free trade area encompassing Canada, Mexico and the US.
Policy mis-steps and the associated uncertainty would have a “severely debilitating effect” on sentiment, growth and jobs, it said, adding in an unmistakable reference to the US president’s trade policy, that “countries should not use tariffs to target bilateral trade balances”.
It also underlined concerns that a sudden outbreak of risk aversion in global markets “could expose financial vulnerabilities accumulated during years of low interest rates”, putting strain on highly leveraged borrowers and indebted governments.
Another worry is the persistence of lower inflation in both developed and emerging economies. The fund said this could make it harder for borrowers to service debts, make companies more reluctant to invest and leave central banks less able to counter any shock to growth by cutting interest rates.
In some rich economies, notably the US, growth in the first quarter of 2019 proved stronger than the IMF expected when it published its full forecasts in April. However, the fund warned that since then the immediate outlook had weakened markedly in China, India and much of Latin America.
It made it clear that the recovery it expects in global growth next year would be mathematically possible only if stressed emerging markets such as Argentina and Turkey recover some stability, and even more troubled economies such as Venezuela and Iran were able to avoid further collapse.
The fund was unequivocal in its support for the recent dovish shift in the stance of the US Federal Reserve, European Central Bank and several major emerging market central banks — which it said had helped markets regain their poise after a sharp sell-off in May.
Given subdued demand and muted inflation, loose monetary policy was appropriate in both advanced economies and in those emerging economies able to keep inflation under control, the fund said, adding that policy would need to be loosened further if growth fell short of its forecasts.