Brexit Affects Global Economic Outlook, Fiscal Stimulus Expected: Reuters Poll

By Rahul Karunakar

Confidence in the global economy has been shaken following Britain’s decision to exit the European Union. There is a growing sentiment that traditional monetary policy is losing its effectiveness, leading many governments to consider increased borrowing and spending.

Concerns about political instability are rising globally, extending beyond the implications of Brexit and the failed coup in Turkey. The United States also faces a period of significant uncertainty as it approaches the November elections.

This troubling phase arrives at a challenging time when central banks no longer have the same influence they once wielded following the Lehman Brothers collapse to counter a major economic downturn.

"Given how fragile the global economy is nearly eight years after the start of the financial crisis, the last thing it needed was the type of jolt provided by the UK’s Brexit vote," noted Janet Henry, global chief economist at HSBC. "We suspect fiscal policy will likely have a larger role to play in many countries from here."

Recent polls conducted by Reuters involving over 500 economists across Asia, Europe, and the Americas indicate either downgrades or no changes to growth forecasts for many nations, coupled with a gradual decline in inflation expectations.

In the United States, despite a generally optimistic economic outlook, there has been a slight reduction in growth projections, with no significant increase in inflation expectations, even in a robust job market.

For 2016, the global growth forecast remains at 3.0 percent, but it has been lowered by 0.1 percentage point to 3.2 percent for 2017, which falls short of the 3.4 percent forecasted earlier by the International Monetary Fund.

As finance ministers and central bankers from the Group of 20 gather in China this weekend, discussions are expected to center on Brexit-related implications and the diminishing policy options available.

Concerns have been raised over the major economies’ persistent struggles to generate inflation, which has led to volatile movements in financial markets over the past year. U.S. stock markets are near record highs, while sovereign bond yields are at historically low levels.

Anticipations of further easing from the Bank of England, the Bank of Japan, and the European Central Bank have somewhat stabilized financial markets, likely driving trends toward higher equity and bond prices as liquidity increases.

TIME TO TURN ON FISCAL TAPS?

A majority of economists surveyed suggest that developed economies that can should increase fiscal spending, similar to recent actions taken by Canada and Japan.

When asked which countries should consider some form of fiscal expansion in the next six months, many economists pointed to major European nations that are currently implementing austerity measures, with Germany being the top choice.

Overall, growth predictions for much of the rest of the world appear lackluster. Britain’s economy is anticipated to revert to recession following its vote to leave the EU, compelling the Bank of England to cut interest rates and reinstate its quantitative easing measures soon.

Given the subdued economic outlook for the largest eurozone economies and the added uncertainty stemming from Brexit, the European Central Bank is likely to prolong and adjust its asset purchase program, potentially by September.

The Bank of Japan is expected to ease its policies later this month in an effort to boost inflation, coinciding with Prime Minister Shinzo Abe’s plans for a new round of fiscal stimulus following recent election victories.

Emerging market economies also face challenges, with South Africa likely to continue experiencing weak growth and high inflation. Brazil, in a precarious situation, is predicted to emerge from recession next year.

China’s growth is projected to slow to 6.5 percent in 2016 and 6.3 percent in 2017, despite the government’s efforts to increase fiscal spending and the central bank’s loosening of policy to stave off a sharper downturn.

India stands out as one of the few emerging markets with a stable outlook, expected to maintain a growth rate surpassing that of China in the coming years. "India has settled into a comfortable stride. Growth looks impressive, even if that’s not always matched by sentiments on the ground," stated Pranjul Bhandari, chief economist in India at HSBC.