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The real global impact of Brexit


The UK’s vote to leave the European Union will reduce global growth from 2,5% to 2,4% in 2016 and from 3,1% to 2,7% in 2017, according to the Global Link Model from IHS Markit.
Impact on the nine largest countries or regions, as measured by gross domestic product (GDP), will be varied, with the UK and Eurozone the hardest hit.
* US – The outcome of the UK referendum will not impact US real GDP growth much in 2016, which is still forecast to be 1,9%. However, the negative impact of the stronger US dollar and resulting weaker US exports to the rest of the world will result in a reduction in growth of 0,2% (from 2,6% to 2,4%) in 2017.
* China – The Brexit fallout will not have a sizable impact on China. China’s real GDP forecast remains unchanged at 6,5% in 2016; China will see a reduction in growth of 0,2% (from 6,4% to 6,2%) in 2017, with the main impact coming through trade. If risks escalate significantly, the Chinese government will likely be more aggressive with monetary policy stimulus to support short-term growth.
* Japan – Japan’s real GDP growth forecast stands unchanged at 0,5% in 2016 and has been revised down to 0,7% from 0,9% in 2017. Recovery works from the Kumamoto Earthquake and the government’s stimulus plans will support near-term economic activities. However, concerns have led to a sharp appreciation of the yen; this will weigh on corporate earnings and in turn, wage increases and consumer spending, offsetting upside from the postponing the consumption tax increase. Cumulative impact from yen strengthening and weaker global demand will suppress goods and service exports and fixed investment.
* Eurozone – The Eurozone’s growth outlook has weakened appreciably following the vote, with real GDP now projected to be 1,5% in 2016, down from our previously forecast 1,7%, and 1,1% in 2017, compared to 1,8 percent. The UK’s decision to leave the European Union will likely increase political instability and economic uncertainty in the Eurozone, weighing down on business and consumer confidence and activity. Banking sector problems may be aggravated and exports to the UK will be hit.
* UK – IHS Global Insight has slashed its UK real GDP growth forecast from 1,9% to 1,6% in 2016 and 2,4% to 0,2% in 2017 as a result of the decision. The vote will cause major economic and political uncertainty and will weigh down on business and household confidence and behaviour, thus dampening corporate investment, employment, and consumer spending.
* Brazil – Unless Brexit escalates into a global economic downturn, the Brazilian economy will not be hurt significantly, as reflected by the 2016 GDP forecast remaining unchanged at -3,6%. However, Brazil will not be unharmed. If commodity prices fall sharply again, export revenue will suffer significantly, affecting the balance of payments, employment, income and consumption. The major impact on Brazil will come from slower growth in China. IHS Global Insight has downwardly revised the forecast for Brazil real GDP in 2017 from -0,6% to -0,8%.
* Russia – The fallout from Brexit is likely to dampen the recovery of the Russian economy somewhat from its 2015-2016 recession. The EU, including the UK, is Russia’s most important export market and increased uncertainty will have an impact on domestic demand there and appetite for Russian exports. The impact on global commodity prices, energy in particular, will also have an impact. Russia’s real GDP is forecast to decline 1,8% in 2016, compared with the earlier projection of -1,6%; and growth will be limited to 0,2% in 2017, down from 0,4% in the previous forecast.
* India – Given the strong fundamentals and reliance on domestic demand, the impact of Brexit on India’s growth should be fairly limited and will depend on the extent of prevailing uncertainty in the markets, which would affect the rupee value, investment, and credit conditions. Since a sizable share of exports go to the EU, weaker European demand would exacerbate and prolong the ongoing exports contraction, also constraining growth. With downside risks intensifying, IHS Global Insight is lowering the outlook for growth to 7,5% from 7,7% in 2016 and to 7,4% from 7,6% in 2017 (fiscal years beginning April 1).
* Canada – International trade and investment flows with the U.K. account for a small share of Canada’s total activity, limiting the impact of the Brexit vote. Instead, Canada’s economy is more vulnerable to commodity price and exchange rate volatility through exports and business investment, which are expected to be very limited. Therefore, IHS Global Insight is lowering Canada’s 2016 real GDP growth from 1,3% to 1,2%, and 2017 GDP from 2,5% to 2,3%.