The UK's vote for Brexit has added "significant uncertainty to an already fragile global recovery", the International Monetary Fund (IMF) said in its World Economic Outlook (WEO) today – as it warned that Britain could potentially go into recession if negotiations with the EU do not proceed smoothly.
The IMF said the result of the EU referendum "implies the materialisation of an important downside risk for the world economy", and as such the global outlook for 2016-17 has worsened.
Ahead of the vote in June the fund warned that an acrimonious Brexit could trigger another recession in the UK.
The fund has revised its baseline global growth forecast down from the previous forecast in the April WEO, by 0.1 percentage points for 2016-2017 – as opposed to the 0.1 percentage point upward revision for 2017 that was envisaged pre-Brexit.
"With Brexit still very much unfolding, the extent of uncertainty complicates the already difficult task of macroeconomic forecasting," the IMF said.
Meanwhile, the UK experienced the largest downward revision in forecasted growth among advanced economies – growth has been revised down by 0.2 percentage points for 2016 and by almost one percentage point for 2017. The IMF said that while growth in the first part of 2016 "appears to have been slightly stronger than expected in April, the increased in uncertainty following the referendum is projected to significantly weaken domestic demand".
The fund laid out two possible scenarios for how Brexit will progress. Under the "downside" scenario, the group said, "it is assumed that financial conditions are tighter and that business and consumer confidence are lower… both in the UK and the rest of the world until the first half of 2017", which would lead to further slowdown in global growth.
In the "severe" scenario, which the IMF said is "less likely", negotiations between the UK and EU would not proceed smoothly and trade arrangements would eventually revert to WTO rules. "A larger portion of UK financial services is assumed to relocate to the euro area," the IMF continued. "This would reduce consumption and investment more markedly relative to the baseline and lead to a recession in the UK."
In the days following the Brexit vote, IMF boss Christine Lagarde called on the UK and the EU to try for an amicable split so as to minimise the fallout for financial markets.