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IMF sharply downgrades UK's growth forecast after Brexit vote

Published 19/07/2016

The IMF cut its growth forecast for the UK in 2016 by 0.2 percentage points to 1.7%
The IMF cut its growth forecast for the UK in 2016 by 0.2 percentage points to 1.7%

The UK's growth forecast has been sharply downgraded by the International Monetary Fund (IMF) following the Brexit vote, with the global economy also expected to be hit by the impact of the referendum result.

The IMF cut its growth forecast for the UK in 2016 by 0.2 percentage points to 1.7% and then slashed it dramatically by 0.9 percentage points to 1.3% in 2017 as the impact of Brexit is felt.

But the organisation warned that the downturn could be even sharper if talks with the European Union on Brexit arrangements encounter difficulties and no trade deal is struck, with the UK facing being plunged into recession.

In the IMF's latest assessment of the global economy, the UK experienced the largest downgrade among advanced economies.

Although growth in the first part of 2016 in the UK had been "slightly stronger" than expected in April at the time of the previous forecast, "the increase in uncertainty following the referendum is projected to significantly weaken domestic demand relative to previous forecasts".

In a sign of the wider impact of Brexit, the IMF has downgraded its global growth forecasts by 0.1 percentage points for 2016 and 2017 to 3.1% and 3.4%.

Those forecasts are based on a "benign" assumption of a gradual reduction in uncertainty with the prospect of a deal between the UK and EU avoiding a large increase in economic barriers, no major financial market disruption and limited political fallout.

But the IMF warned that "more negative outcomes are a distinct possibility" - and presented two possible scenarios for the aftermath of Brexit.

In the "downside" scenario, financial conditions would be tighter and business and consumer confidence would be lower, with the UK also suffering from the loss of some of its financial services sector to the euro area.

That would result in global growth of 2.9% in 2016 and 3.1% in 2017.

The "severe" scenario was "less probable" and envisages that negotiations between the UK and Brussels "do not proceed smoothly", trade arrangements eventually revert to World Trade Organisation rules and more of the City relocates to the euro area.

"This would reduce consumption and investment more markedly relative to the baseline and lead to a recession in the United Kingdom", the IMF report warned.

Under this scenario global growth would fall to 2.8% in 2016 and remain at that level in 2017 - a 0.6 percentage point fall.

IMF chief economist Maury Obstfeld said the organisation had been prepared to upgrade global growth projections slightly but "Brexit has thrown a spanner in the works".

He added: "Naturally, the direct effects specifically due to Brexit are greatest in Europe, especially the United Kingdom."

"Our projections for other areas are little changed by Brexit.

"Despite an uneven distribution across regions of the world, the overall growth downgrade in our baseline global projection is moderate, reflecting among other things a relatively benign assessment of Brexit's negative impact."

But he said information in the short period following the Brexit vote was so far "very limited" and the effects will emerge over time " adding elements of economic and political uncertainty that could be resolved only after many months".

A Treasury spokeswoman said: "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.

"As the Chancellor has said, our absolute priority is to send a clear signal to businesses both here and across the world, that we are open for business and determined to keep Britain an attractive destination for investors from overseas. We are stronger than we were in 2010 and well-placed to rise to the challenges ahead."

The reduced growth forecast by the IMF would shrink the size of the economy by £21 billion by next year, according to the Resolution Foundation think-tank, potentially leading to a £7.8 billion reduction in the tax take.

Resolution Foundation chief economist Matt Whittaker said: "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.

"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 £21 billion reduction in the size of the economy alone would reduce the tax take by £150 million a week.

"With living standards still showing the effects of the 2008 financial crisis, any reduction in growth will have profound implications for Britain's households."

Shadow chancellor John McDonnell said: "Today's report from the IMF is another blow for the Government and further highlights that they had no plan whatsoever for after a Brexit vote."

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