World Economic Prospects

Abstract

Overview: Brexit vote is not a ‘Lehman Brothers moment’ The surprise UK vote for Brexit on June 23 caught markets on the hop. There was a strong initial equity sell‐off but much of this has faded – world stocks are only 2% down from their pre‐referendum level. Moreover, key global financial stress measures are not sending danger signals; this does not look like a ‘Lehman Brothers moment’. We nevertheless expect economic uncertainty to linger for a while. The new UK‐EU relationship will take time to flesh out, and – perhaps more significantly – the UK vote seems to have re‐focused investors on weak spots in the global economy that have been glossed over in recent months. Our new global forecasts see the economic fall‐out from the UK vote concentrated in the UK (growth now 1.3% per year on average in 2017–18 from 2.2–2.3% before) with some negative spillovers to the Eurozone and Japan (the latter via the stronger yen). But we expect little change in the US outlook, helped by a more cautious Fed – we now expect only one US rate rise this year. And with some upgrades to EM our world GDP forecast is unchanged for this year at 2.3% and down 0.1% in 2017 and 2018, to 2.6% and 2.8%. An obvious risk to the forecast is that confidence effects on consumers and businesses are larger than expected – but such effects are often overstated. Another danger is that financial market weakness is greater than we expect in our new baseline; we expect world stocks to be around 2% lower than we previously thought in the coming quarters. Overall, the risks to our new forecasts are skewed to the downside. Global financial conditions have been tightening since the middle of last year and the latest developments are unlikely to help. Our recession risk indicator was already pointing to a danger of sub‐2% world growth before the UK vote. The case for precautionary policy easing by the major economies is strong: the UK is already on this path, and the slump in core bond yields in part suggests broader central bank stimulus being priced in. Fiscal measures are also possible – low yields help here.