Uncertainty over Brexit vote hurting UK economy, says IMF

The International Monetary Fund says that Britain’s vote to leave the EU is already damaging the UK despite a strong recovery in the world economy, and warned that losses in tax revenues could exceed any gains from ceasing net contributions to Brussels, according to report by Financial Times (FT).

The fund’s annual health check of the UK economy on Wednesday highlights the difficulties it sees for Britain as negotiations move to the second stage of talks which include a potential transition deal and the broad outlines of Britain’s future trading relationship with the EU.

The Brexit referendum result and the decision to invoke Article 50 “are already having an impact on the economy even though the UK is not planning to leave the EU until 2019,” said IMF managing director Christine Lagarde.

She added, “we feared that if Brexit was decided upon, it would most likely entail a depreciation of sterling, an increase in inflation, a squeezing in wages and a slowdown and a reduction of investment.”

What we are seeing is that that narrative we identified as a potential risk is being rolled out as we speak. It’s not experts talking, it’s the economy saying that. Our forecast is 1.6 percent GDP growth] this year and 1.5 next year, which relative to the upward revisions we are advocating for other advanced economies is a bit of a disappointment.

With growth rates declining in the UK this year while they were climbing in Europe the US and Japan, the IMF was in no doubt that Britain was already paying a price for the Brexit vote.

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“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’s statement at the end of its two-week mission to the UK concluded.

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

While it said there had been some offsetting gains from higher exports following sterling’s 10 percent decline after the EU referendum, it concluded that in 2017 “output is expected to grow by 1.6 percent this year, broadly in line with our estimate of the economy’s potential”.

That figure is almost a percentage point below the fund’s assessment of Britain’s growth prospects in 2017 before the EU referendum.

For 2018, the IMF said: “Firms are likely to continue deferring some investment decisions until there is greater clarity on the UK’s future trading relationship with the European Union”.

The fund was supportive of the Bank of England’s decision to raise interest rates in November and the government’s tax and spending policy, although it said that with pressures on public spending rising, any future deficit reduction should come more from tax increases than in the austerity policies of the past seven years.

But it warned that Brexit was likely to worsen the public finances if there was a hit to an output of more than one percent 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.”