Brexit uncertainty could drag on Europe's economy says the World Bank as it forecasts a big slowdown in the UK economy

 
Jasper Jolly
The logo of the World Bank is seen at th...
The World Bank predicts a modest recovery in global growth rates in 2017 (Source: Getty)

Brexit uncertainty could drag down growth prospects across Europe according to the World Bank, as it forecasts a sharp slowdown in UK growth this year.

UK GDP growth is predicted to fall from two per cent last year to 1.2 per cent in 2017, the World Bank’s twice-yearly Global Economic Prospects report has found.

In contrast, world economic growth will recover in 2017 to 2.7 per cent, after dipping to 2.3 per cent – the lowest point since the financial crisis – despite the increasing downside risks.

Read more: Political threats could hit fragile global growth

Uncertainty as the UK leaves the EU could impact European investment levels. This could then have an impact on emerging economies which source much of their financing from Western Europe, the report says.

Franziska Ohnsorge, lead economist at the World Bank and one of the report’s authors, said: “The UK itself is only a very close trading partner for a few countries but if uncertainty sets back the EU as a whole that would affect emerging markets.”

The World Bank, whose main function is to lend money for investment to developing nations, also raises big questions about global policy uncertainty surrounding the election of Donald Trump as US President.

“Faster US growth is good for the world,” said Ohnsorge, with each one per cent increase in US GDP growth contributing 0.7 per cent to the global measure. Trump’s apparent desire for large fiscal stimulus could boost the world economy more than expected, but the World Bank has so far not incorporated potential fiscal policies into its forecasts.

Read more: Another Brexit downgrade for UK GDP growth from OECD

However, the risks to growth remain more prominent on the downside, according to World Bank forecasts. The increased protectionism heralded by Trump could slow growth worldwide, the bank says.

The slowdown in Chinese growth is also set to impact global growth, as demand for raw materials begins to fall.

“Clearly the slowdown in China has already had an impact – particularly on commodity exporters,” said Ohnsorge.

Uncertainty on US economic policy could have a negative impact on investment in emerging markets of 0.5 percentage points within a year, according to the bank’s projections. This reflects a similar analysis of European uncertainty which showed a negative impact on Eastern European investment of up to 1.3 per cent, said Ohnsorge.

The report says: “Uncertainty around global growth projections for 2017 has increased, and the balance of risks remains tilted to the downside, amid unclear prospects for policy direction in major economies.”

The report also suggests advanced economies adopt “more supportive” fiscal policies to boost growth as interest rates remain low across the developed world, including the UK.

Global growth has struggled to shake off the effects of the financial crisis in 2009, when the economy shrank by 1.7 per cent.

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