IMF predicts growth in Middle East but warns of Brexit impact on global economy

Iraq, July 21, 2016

The International Monetary Fund raised its 2016 growth forecast for the Middle East and North Africa on the back of a rebound in oil prices, but warned that Britain's decision to exit the European Union has further depressed the global economic outlook in the years ahead as the uncertainty is projected to take a toll on confidence and investment across the globe.

The Middle East, along with Afghanistan and Pakistan, is set to see economic growth of 3.4 per cent this year and 3.3 per cent for 2017, respectively up 0.3 per cent and down 0.2 per cent on the Fund's previous forecast made in April, citing fallouts from "terrorism" and geopolitical tensions in its World Economic Outlook update.

"In the Middle East, oil exporters are benefiting from the recent modest recovery in oil prices while continuing fiscal consolidation in response to structurally lower oil revenues," the IMF said.

"Geopolitical tensions, domestic armed strife, and terrorism are also taking a heavy toll on the outlook in several economies, especially in the Middle East, with further cross-border ramifications," it said.

The IMF maintained its growth projections for Saudi Arabia, the world's top crude oil exporter, at 1.2 per cent for this year and raised it slightly to two per cent for 2017.

The economies of the kingdom and its oil-exporting peers in the GCC states have been hit hard by the slide in oil prices which began more than two years ago. They have lost hundreds of billions of dollars in revenues, prompting them to take austerity measures and resort to borrowing to plug the huge budget deficits.

The Washington-based Fund has revised down the baseline global growth forecast to 3.1 per cent in 2016 and 3.4 per cent in 2017, modestly relative to the April 2016 World Economic Outlook (by 0.1 percentage points for 2016 and 2017, as compared to a 0.1 percentage point upward revision for 2017 envisaged pre-Brexit.

The downward revision is the fifth straight cut in a year, putting world economic growth at last year's 3.1 per cent and only marginally above the three per cent rate the IMF has previously considered a technical recession globally. The IMF said in its latest WEO released on Tuesday that the outcome of the UK vote, which came as a surprise to the global financial markets, implies the materialisation of an important downside risk for the world economy.

As a result, the IMF said the global outlook for 2016-17 has worsened, despite the better-than-expected performance in early 2016. "This deterioration reflects the expected macroeconomic consequences of a sizable increase in uncertainty, including on the political front. This uncertainty is projected to take a toll on confidence and investment, including through its repercussions on financial conditions and market sentiment more generally."

With Brexit still very much unfolding, the extent of uncertainty complicates the already difficult task of macroeconomic forecasting, said the IMF.

The IMF's latest revision resonates with the June forecast made by the World Bank, which also downgraded its 2016 global growth outlook to 2.4 per cent from the 2.9 per cent pace projected in January. The move is due to sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.

The OECD forecasts world economic growth of three per cent in 2016 and 3.3 per cent in 2017 (a reduction of 0.3 per cent from its November 2015 forecasts). The Economist Intelligence Unit forecasts world economic growth of 2.3 per cent in 2016 and 2.6 per cent in 2017.

The global financial institution said the initial financial market reaction, expectedly "was severe but generally orderly", stating that as of mid-July, the pound in response to the unexpected development, "weakened by about 10 per cent. It said despite some rebound, equity prices stayed lower in some sectors, especially for European banks; and yields on safe assets have declined.

However, before the June 23 vote in the UK in favour of leaving the European Union, economic data and financial market developments suggested that the global economy was evolving broadly according to forecast in the first month of the second quarter of the year, the IMF said.

It said growth in most advanced economies remained lacklustre, with low potential growth and a gradual closing of output gaps, pointing out that prospects remained diverse across emerging markets and developing economies, with some improvement for a few large emerging markets, amongst which were Brazil and Russia, indicating a modest upward revision to 2017 global growth relative to the April's 2016 forecast.