IMF cuts UK growth forecasts following Brexit vote

Christine Lagarde

The International Monetary Fund has slashed its forecast for UK growth next year after warning that the decision to leave the EU has damaged the British economy’s short-term prospects and “thrown a spanner in the works” of the global recovery.

The IMF, which voiced strong misgivings about a vote for Brexit in the run-up to the EU referendum, said it expected the UK economy to grow by 1.3% in 2017, 0.9 points lower than a previous estimate made in its April world economic outlook (WEO).

While the fund is currently ruling out a full-blown recession as a result of the Brexit vote, the analysis by one of the leading global economic bodies underlines the financial challenges facing Theresa May’s government, since slower growth will lead to lower tax receipts and a bigger budget deficit.

A separate forecast from the European commission provided a gloomier outlook. The commission said the UK would, at best, grow by 1.1% in 2017, but there was a risk that the economy could contract by 0.3% in the worst case scenario.

The IMF said it had cut its forecasts for the global economy due to the likely knock-on effect of the vote on other countries, particularly in Europe.

Maury Obstfeld, the IMF’s economic counsellor, said: “The first half of 2016 revealed some promising signs – for example, stronger than expected growth in the euro area and Japan, as well as a partial recovery in commodity prices that helped several emerging and developing economies.

“As of 22 June [the day before the referendum], we were therefore prepared to upgrade our 2016-17 global growth projections slightly. But Brexit has thrown a spanner in the works.”

The IMF predicted global growth of 3.1% in 2016 and 3.4% in 2017, both of which are 0.1 points lower than forecast in April. Britain is still expected to be the second-fastest growing economy in the G7 this year, behind the US, despite having its growth forecast for 2016 trimmed by 0.2 percentage points to 1.7%.

Next year, the IMF believes that the UK will experience similar growth rates to Germany – the eurozone economy most affected by the Brexit-induced slowdown – and France.

It said: “The vote in the United Kingdom in favour of leaving the European Union adds significant uncertainty to an already fragile global recovery.

“The vote has caused significant political change in the United Kingdom, generated uncertainty about the nature of its future economic relations with the European Union and could heighten political risks in the European Union itself.

“This erosion of confidence was reflected in a large initial sell-off in global financial markets, which has since partly reversed. But continuing uncertainty is likely to weigh on consumption and especially investment.”

The update to the WEO said there was a risk that the impact of the UK’s decision to leave the EU could prove to be worse than expected. “With Brexit still very much unfolding, the extent of economic and political uncertainty has risen, and the likelihood of outcomes more negative than the one in the baseline has increased,” the IMF said.

The IMF outlined two alternative scenarios to its forecast, one moderately worse and one significantly worse than the baseline prediction. However, Obstfeld said the resilience of financial markets since 23 June meant that the fund was putting “less weight” on those gloomy forecasts, particularly the more severe one.

Policymakers in the UK and the rest of the EU have a vital role to play in reducing uncertainty, the IMF said. “Of primary importance is a smooth and predictable transition to a new set of post-exit trading and financial relationships that as much as possible preserves gains from trade between the UK and the EU.”

A Treasury spokesman said overtures from Australia about a new trade deal and the willingness of Japan’s Softbank to pay £24bn for the UK technology company ARM Holdings showed that the UK could make a success of Brexit.

“The decision to leave the European Union marks a new phase for the British economy, but the message we take to the world is this: our country remains open for business. We are the same outward-looking, globally minded, big-thinking country we have always been,” the spokesman said.

The IMF said it had revised up its forecast for eurozone growth in 2016 because of a stronger than expected performance in the first half of the year. Its forecast for eurozone growth in 2017 had been cut by 0.2 points to 1.4% as a result of increased business and consumer uncertainty, and the additional stress that Brexit will have on vulnerable eurozone banks. Projections for other large economies such as the US, China and India were little changed by the referendum result.

“From a macroeconomic perspective, the Brexit vote implies a substantial increase in economic, political and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies,” the WEO said. “But with the event still unfolding, it is very difficult to quantify its potential repercussions.”

Matt Whittaker, the chief economist at the Resolution Foundation, said if the IMF forecast were right, the UK economy would be £21bn smaller than previously anticipated in 2017.

“There is huge uncertainty around the UK’s economic prospects in the wake of the decision to leave the EU, though most agree there will be a short-term hit to growth,” he said.

“The IMF outlook today, while less pessimistic than many of the projections we’ve had from the City, reiterates the scale of the task facing the new chancellor when he sets out his Brexit budget this Autumn. A £21bn reduction in the size of the economy alone would reduce the tax take by £150m a week.”

Powered by Guardian.co.ukThis article was written by Larry Elliott Economics editor, for theguardian.com on Tuesday 19th July 2016 14.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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