The International Monetary Fund (IMF) has slightly revised upwards its 2016 forecast for China, while cutting its forecast for global economic growth this year and next year, partly as a result of the unexpected UK vote to leave the European Union.
The IMF cut its global forecast for 2016 and 2017 by 0.1 percentage point each to 3.1 percent and 3.4 percent respectively, compared with the forecast made in April.
It said the Brexit causes "substantial" increase in economic, political and institutional uncertainty. "If not for Brexit, global forecast would have been slightly higher," said the IMF World Economic Outlook Update released on Tuesday.
It forecast the UK economy to grow 1.7 percent this year, 0.2 percentage point less than the forecast made in April. Next year, the nation's growth will slow to 1.3 percent, down 0.9 point from the April estimate and the biggest reduction among advanced economies.
For the euro area, the fund raised its forecast by 0.1 point this year, to 1.6 percent, and lowered it by 0.2 point for 2017 to 1.4 percent.
China's growth forecast for 2016 is up 0.1 percentage point to 6.6 percent, and remains unchanged for 2017 at 6.2 percent.
Brexit fallout is likely to be muted for China, the world's second-largest economy, because of its limited trade and financial links with the UK.
"However, should growth in the European Union be affected significantly, the adverse effect on China could be material," the IMF said.
The IMF said the near-term outlook in China has improved due to recent policy support. Benchmark lending rates were cut five times in 2015, fiscal policy turned expansionary in the second half of the year, infrastructure spending picked up and credit growth accelerated.
The fund also described the indicators of real activity as "somewhat stronger than expected" in China, reflecting policy stimulus.
"While global industrial activity and trade have been lackluster amid China's rebalancing and generally weak investment in commodity exporters, recent months have seen some pick-up due to stronger infrastructure investment in China and higher oil prices," the IMF said.
Maurice Obstfeld, IMF's economic counsellor and director of research department, said the IMF upgraded forecast for China in the view of the support that the Chinese authority has been providing for the economy.
He admitted that China and EU are important mutual trade partners and the anticipated slowdown in Europe and in the baseline will affect China slightly, possibly by 0.1 percentage points in 2016 and 2017.
"So the effect is there. It's offsetting the lift coming from policy the authority has taken to hit their growth target," he told a press briefing on Tuesday.
Obstfeld expressed concern about some imbalances in the Chinese economy, such as impaired assets in the banking system and the slow progress in shifting the economy from state-owned enterprise system to be more privately owned system.
He described it as countering to the trends IMF thinks Chinese economy is going and the trends the Chinese authority wants the economy to go. "So that leads us to leave our 2017 number unchanged," he said.
Chinese Premier Li Keqiang on Monday called for more private and semi-public businesses to invest in the key projects to be launched during China's 13th Five-Year Plan period (2016-20). He said the interests and legitimate rights of investors should be protected.
"The fact that, despite the uncertainties caused by Brexit, the IMF's growth short-term forecast for China remains largely unchanged suggests that the immediate domestic and external threats to China's growth have abated. However, there remain longer-term challenges to sustaining this growth without creating further risks in the financial system," said Eswar Prasad, a senior fellow at the Brookings Institution and a professor at Cornell University.
Prasad, a former IMF official and once its head in China, said the updated IMF forecast helps repudiate the excessively pessimistic views about China's economy that were rampant in financial markets earlier this year, although there is still plenty of ammunition for pessimists to maintain their negative outlook.
The IMF report also said Brexit's fallout is likely to be felt in Japan, where a stronger yen will limit growth. The IMF cut Japan's 2016 growth forecast by 0.2 percentage point, to 0.3 percent. Next year, Japan's economy, the world's third-largest, is expected to expand 0.1 percent, 0.2 percentage point more than predicted in April, due to a postponement of the consumption tax increase.
In the U.S., weaker-than-expected growth in the first quarter prompted the IMF to reduce its 2016 forecast to a gain of 2.2 percent, 0.2 percentage point less than the April outlook. The IMF left its 2017 forecast for U.S. growth unchanged at 2.5 percent.
