The potential failure of Brexit negotiations and “unsettled” politics pose a risk to world economic growth, the International Monetary Fund (IMF) has warned.
In its latest World Economic Outlook, the organisation downgraded global economic growth to 3.7% for both 2018 and 2019 – 0.2% lower for both years than had been forecast in April.
The UK economy is expected to grow by 1.4% this year – down from April’s prediction of 1.6% – while predicted growth for 2019 remains at 1.5%, a slowdown from 1.7% in 2017.
Disruptive weather in the first few months of the year is partly to blame for the UK’s weaker-than-expected economic performance, the IMF said, while policy uncertainty, including trade tensions between the US and China, have played a role in the tempered global expectations.
“Uncertainty over trade policy is prominent in the wake of US actions (or threatened actions) on several fronts, the responses by its trading partners, and a general weakening of multilateral consultation on trade issues”, the report said.
“The possible failure of Brexit negotiations poses another risk.”
The organisation added that the ongoing Brexit negotiations had also created “pervasive uncertainty” about future trade costs.
“An intensification of trade tensions and the associated further rise in policy uncertainty could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade,” the report said.
“An increase in trade barriers would disrupt global supply chains, which have become an integral part of production processes in the past decades, and slow the spread of new technologies, ultimately lowering global productivity and welfare.
“It would also make tradable consumer goods less affordable, harming low-income households disproportionately.”
Maurice Obstfeld, economic counsellor for the IMF, warned of “clouds on the horizon”, adding: “Trade policy reflects politics, and politics remain unsettled in several countries, posing further risks.
“To gauge the severity of the threats to growth, one must ask how governments could respond if risks are realised and widespread recession ensues. The answer is not comforting. Mechanisms of multilateral global policy cooperation are under strain, notably in trade, and need strengthening.”
In its suggestions to boost growth, the IMF said the UK should look at easing planning restrictions to boost housing supply, improve the quality of transport infrastructure, and facilitate the relocation of workers in industries that are likely to be more affected by higher trade barriers after Brexit.
It also said interest rates would need to rise to curb inflation, but urged the Bank of England to remain “flexible” depending on what happens with Brexit.
The report said: “In the United Kingdom, where the output gap is closed and unemployment is low, a modest tightening of monetary policy may be warranted, although at a time of heightened uncertainty, monetary policy should remain flexible in response to changing conditions associated with the Brexit negotiations.”