IMF warns Brexit could deal damaging blow to global economy

Britain could deal a damaging blow to the fragile global economy if it votes to leave the European Union in June, the IMF said on Tuesday in the sharpest warning yet from a global body about the risks associated with Brexit.

In a half-yearly assessment of the world economy, the International Monetary Fund listed the June 23rd referendum on Britain staying in the EU as a key risk alongside instability in China and other emerging markets, volatile share prices and a loss of long-term growth potential in advanced economies.

"The planned June referendum ... has already created uncertainty for investors," the fund's chief economist Maurice Obstfeld said. "A Brexit could do severe regional and global damage by disrupting established trading relationships."

The euro zone economy will grow more slowly than thought and inflation will pick up only very gradually, putting the onus on the European Central Bank to keep monetary policy ultra-loose for the foreseeable future, the IMF said.

In its World Economic Outlook, in which it also urged governments to push through growth-focused reforms, the International Monetary Fund forecast the 19-country economy would expand 1.5 per cent this year and 1.6 percent in 2017.

In its January outlook it predicted 1.7 per cent for both years.

Euro zone inflation would reach 1.1 per cent in 2017 as the ECB’s ultra-low interest rates and bond buying gained traction, but it would rise only very gradually in the following years.

“The ECB’s asset purchase program has supported the recovery by improving confidence and financial conditions,” the fund said. “But persistently low inflation and subdued growth point to the need for policy to remain accommodative for an extended period.”

Last month the ECB cut its three main interest rates and expanded its asset purchase programme, modified several times since its launch 13 months ago and which it now expects to run at least until March 2017.

“The ECB should continue to signal strongly its willingness to use all available instruments until its price stability objective is met,” the IMF said.

The ECB forecasts inflation this year at 0.1 per cent and 1.3 per cent in 2017, still short of its target of just under 2 per cent.

To help the ultra-low rates impact the real economy, banks’ balance sheets should be strengthened, the fund said, while euro zone governments also had to play their part.

“With persistently high youth unemployment rates in many countries, skill erosion and its effect on trend employment are palpable concerns,” the report said.

“Lowering disincentives to employment ... and putting in place better-targeted active labour market policies would be important to boost demand and minimize the scarring effect of long-term unemployment.”

Reforms to improve firms’ productivity, competitiveness, and investment prospects were also required, while the European Union needed to make full use of flexibility in its budget rules.

“In the euro area, countries with fiscal space under the Stability and Growth Pact should do more to support demand - for example, by expanding public investment,” the IMF said, in a veiled reference to Germany.

Berlin runs a budget surplus while levels of investment in the country are still relatively low.

Reuters