The International Monetary Fund (IMF) was expected to raise its estimate of global economic growth by 0.1% because the early months of the year went better than expected, particularly in major developing economies like China, Russia and Brazil. But Brexit has forced a complete rethink at the Fund.

Central scenario

The IMF now forecasts 3.1% global growth this year and 3.4% next year - that’s 0.1% lower than its April prediction for both years.

The assumption is that there'll be a modest reduction in confidence, no major new economic barriers from UK exit negotiations with the EU (including the relocation of financial institutions to the EU) and no major financial markets sell-off.

But the Fund regards the risks as difficult to assess and has outlined two other scenarios - ‘downside’ and ‘severe'.

Image: IMF

Downside scenario

Under the downside scenario, global growth is 0.3% lower this year and 0.4% lower in 2017 than April’s forecast. That’s due to much tighter credit conditions, lower business and consumer confidence, and a portion of the UK financial services sector relocating to the euro area.

Severe scenario

The least likely scenario sees global growth cut sharply by 0.5% this year and by 0.7% in 2017. That’s the result of even tighter credit conditions in advanced European economies, a bigger impact on confidence, difficult trade negotiations between the UK and EU that result in a reversion to the World Trade Organisation’s rules, and a much bigger proportion of the City relocating to Europe.

The Fund notes that the impact of Brexit is likely to be most keenly felt within the more advanced nations of Europe and that effects on major economies like the US, China and Japan will be relatively weak.