Impact of anxiety over Brexit
April 13, 2016: The International Monetary Fund has cut its forecast for British economy from its previous 2.2% estimate to 1.9%, due to the uncertainty over Brexit.
In its report titled ‘World Economic Outlook’, the IMF predicts that there will be a slight acceleration in growth this year, from 3.1 to 3.2 percent, followed by 3.5 percent growth in 2017. It stated that projections will continue to be progressively less optimistic over time.
It said that lower energy prices and a booming property market were counterbalanced by ‘headwinds’ of ‘fiscal consolidation and heightened uncertainty ahead of the June referendum on European Union membership’.
The report added: “A British exit from the European Union could pose major challenges for both the United Kingdom and the rest of Europe. Negotiations on post-exit arrangements would likely be protracted, resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment, all the while increasing financial market volatility.
“A UK exit from Europe’s single market would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration, such as those resulting from economies of scale and efficient specialization.”
James Knightley from ING Financial Market argued that the major reason for the UK economy’s loss of momentum has been the uncertainty over Brexit. “With opinion polls suggesting that the vote will be incredibly close, businesses are likely to act cautiously and not embark on any significant expansion plans until the economic outlook is clearer. This means that investment and labour hiring plans will be more limited,” said Knightley.
“Should the UK vote to remain within the EU, then we suggest that the slowdown will be temporary and the delayed hiring and investment plans will be reinstated, leading to a decent bounce in activity in 2H16. However, should the UK vote to leave, then expansion plans are likely to be cancelled, business and consumer sentiment will take a hit and the Bank of England would likely have to step in with policy stimulus to try and shore-up confidence.”
Peter Vanden Houte, Chief Eurozone Economist at ING, said that in a Brexit scenario, the rest of Europe would go through a period of turmoil in the financial market as well as politically. “European leaders would have to spend even more time on keeping emerging separatist and populist movements at bay in order to avoid further centrifugal forces.”