The International Monetary Fund (IMF) has warned that the rise of protectionist rhetoric in countries including Britain poses a threat to global growth and increases the prospect of “political discontent” in advanced economies.
In its latest World Economic Outlook, the IMF said weaker growth rates across the US, UK and EU have sparked concerns about foreign competition for jobs and enhanced the appeal of anti-trade and anti-immigrant policy stances.
“These concerns can in turn spur a political backlash, as demonstrated by the current US presidential election campaign and the campaign preceding the Brexit vote in the United Kingdom,” the report said.
Since its last update in July, the IMF has raised its UK outlook by 0.1% to 1.8% for 2016, but cut its 2017 forecast by 0.2% to 1.1%.
The upward revision came amid a rebound in manufacturing activity and relatively strong retail sales in the months following the EU referendum vote. However, it went on to note that Brexit will be an “unfolding event” and that relations between the EU and UK “will be uncertain for a protracted period of time”.
The IMF said: “In the United Kingdom slower growth is expected since the referendum, as uncertainty in the aftermath of the Brexit vote weighs on firms’ investment and hiring decisions and consumers’ purchases of durable goods and housing.”
The IMF also cuts its US growth forecast by 0.6% to 1.6% for this year, and by 0.3% to 2.2% for 2017. It comes after the US delivered weaker-than-expected growth figures in the second quarter, as labour productivity declined, business investment weakened, and a strong dollar dragged on exports.
The IMF added that potential protectionist policies could have major consequences for global trade flows.
“Uncertainty about the evolution of these trends may lead firms to defer investment and hiring decisions, thus slowing near-term activity, while an inward-looking policy shift could also stoke further cross-border political discord,” it warned.
One scenario put forward by the IMF shows how a unilateral increase in trade tariffs by one government could spark retaliation by another, and ultimately hurt gross domestic product (GDP) growth, consumption and investment across both countries.
Another scenario illustrates how a general increase in protectionism across the world, with governments increasing both import taxes and non-tariff trade barriers, would affect the global economy.
“The result is not just a collapse in trade flows, but also a sharp decline in global output.
“The negative repercussions for the global economy could be even larger because the disruption in international economic linkages drive a more generalised decline in cross-border co-operation,” the report said.
Earlier this summer, the IMF shaved 0.1% off growth forecasts for both 2016 and 2017. Growth is now expected to slow to 3.1% this year before recovering to 3.4% over the following 12 months.
That downward revision was chalked up to weaker-than-expected US growth and uncertainty regarding Brexit.
While the report acknowledged that financial markets’ reaction to the Brexit vote was relatively “contained”, the heightened economic, political and institutional uncertainty surrounding trade and financial flows between the UK and EU is expected to have “negative macroeconomic consequences”, especially in the UK.
The IMF is not expecting a quick turnaround for Brexit negotiations, saying the “long-term shape of relations” between Britain and Europe may only become clear “after several years”.
As a result, the organisation cut its growth forecast for advanced economies to 1.6% for 2016, which is 0.5% lower than 2015.