(FT) Brexit vote is already damaging UK economy, says IMF

By Chris Giles

The International Monetary Fund said on Wednesday that Britain’s vote to leave the EU is already damaging the UK economy, as it defended its gloomy outlook for the UK after Brexit.

Speaking at the end of the fund’s two-week mission to assess the health of the UK economy, Christine Lagarde said the economy was performing much as the Washington-based international organisation predicted before last year’s EU referendum.

Pulling no punches, the IMF’s managing director said: “We feared that if Brexit was decided upon, it would most likely entail a depreciation of sterling, an increase of inflation and a squeezing in wages and a slowdown and probably a reduction of investment.”

“I know that some people at the time said, ‘Oh, it’s those experts,’ . . . but what we are seeing is that narrative we identified as a potential risk in May 2016 is actually being rolled out as we speak,” she said. “This is what we are seeing. It’s not experts talking, it’s the economy demonstrating that.”

In its report on Wednesday, the IMF said there was no doubt that Britain was already paying a price for last year’s Brexit vote, as economic growth rates have declined in the UK but climbed in Europe, the US and Japan.

The IMF cut its UK growth forecast for 2017 from 1.7 per cent to 1.6 per cent, and said growth would slow further next year.

“Despite a strong recovery in global growth and supportive macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand,” the fund said in its end-of-mission statement.

“Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilisation, owing to heightened uncertainty about economic prospects.”

The fund was supportive of the Bank of England’s decision to raise interest rates last month, as well as the UK government’s tax and spend policies. But it said that with pressures on public spending rising, any future deficit reduction should come from tax increases, rather than further spending cuts.

However, the IMF also warned that Brexit was likely to worsen the public finances if output was dented by more than 1 per cent of national income.

“The losses associated with just a 1 percentage point decline in long-run output would therefore more than offset the gains from any net savings from lower contributions to the EU budget post-Brexit,” the IMF warned. “Taken together, this means that the UK may in the future face difficult decisions about the desired size of its public sector, as well as the mode of delivery and financing of public services.”

The IMF said there were both upside and downside risks to the UK economy in the years ahead, largely based on progress in ensuring an orderly Brexit.

Ms Lagarde welcomed the progress in the Brexit negotiations so far and urged both the UK and the remaining 27 EU countries to negotiate a “standstill” transition period as quickly as possible.

Philip Hammond, UK chancellor, said on Wednesday that he shared the fund’s view that Britain needed to have a transition deal in place quickly.

“As the negotiations with the EU enter the second stage, it is imperative that we move on with discussion to secure a smooth and orderly withdrawal from the EU,” he said, adding: “The IMF report notes that early agreement on a transition would avoid a cliff edge in March 2019 and reduce the uncertainties facing businesses and households. I agree.”