If you thought the US and UK economies were going to see great growth in 2017, it might be time to think again—at least, according to the International Monetary Fund (IMF) that recently cut the growth forecasts for both countries.
The move signals a change in the global economy, as other countries pick up the slack from economies once thought to be the most powerful on the globe.
“Weaker than Expected” UK Growth
After originally predicting the UK economy could grow by 2%, the IMF changed its forecast to 1.7% growth, citing “weaker-than-expected activity” during the first quarter of 2017 when the economy grew just 0.2%. It was the first downgrade since the Brexit vote last year.
The IMF had initially raised its forecast for the UK after the referendum and a stronger-than-expected end to 2016, predicting 2017 growth of 1.1% in October 2016 and increasing it again in January and April.
Although the IMF has been closely watching the Brexit proceedings to see the impact on the economy, the most recent downgrade is solely due to early 2017 performance.
“We have long predicted that Brexit would have some negative long-term effects, but in the case of this year’s forecast [downgrade] we are basing it purely on the observation of data for the first part of this year which has been weaker than expected,” said Maurice Obstfeld, the IMF’s chief economist. “Our projections for long-term British growth are actually based on a pretty optimistic assessment of how the negotiations are likely to turn out, so if things are worse than that it will turn out to be correspondingly worse for the British economy.”
The IMF didn’t change its UK prediction for 2018 and acknowledged that much of its forecast depends on the outcome of the Brexit negotiations. One key risk facing the global economy is that Brexit talks will end in failure.
US Growth Drops
The prediction for the US was also dropped by 2.3% to 2.1%. US growth for 2018 was decreased from 2.5% to 2.1%.
The IMF said its reasons for changing 2017 and 2018 projections for the US are because the country’s fiscal policy will be “less expansionary” than previously assumed, meaning that Donald Trump’s expected policies to expand the economy are now in danger of not getting passed.
The IMF acknowledged that the most important downgrade for the global growth perspective is the US. With US fiscal policy difficult to predict, the country’s economy could slow and impact the rest of the world.
Rest of the World
The IMF’s forecast for the global economy as a whole is unchanged at 3.5% for 2017 and 3.6% for 2018. This is largely due to strong performances in China, Japan, and the eurozone as the world leans less on the strength of the UK and US economies.
The IMF increased its growth projections for many countries in the eurozone, including France, Germany, Italy, and Spain. China’s forecast also received a boost to 6.7% from 6.6%.
“The recovery in global growth that we projected in April is on a firmer footing; there is now no question mark over the world economy’s gain in momentum,” said Obstfeld.
The IMF encouraged advanced countries with weak demand and low inflation to support growth through fiscal policy without raising borrowing costs too quickly in an effort to strengthen the entire global economy.
Although IMF predictions aren’t always correct, they are generally accepted as a good benchmark for economic performance. Downgrades to the UK and the US show the shifting power in the global economy and highlight how things are changing around the world.
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