The UK economy would rapidly start to contract in the event of a disruptive exit from the EU next spring, according to a stark International Monetary Fund report that highlights the recession risks of a no-deal Brexit.
Christine Lagarde, the IMF’s managing director, added that there would be costs to the UK under any outcome that involves leaving the EU.
Expressing the IMF’s growing concern at the possibility of an acrimonious divorce next March, Lagarde said: “If that happened there would be dire consequences. It would inevitably have consequences in terms of reduced growth, an increase in the [budget] deficit and a depreciation of the currency.
“In relatively short order it would mean a reduction in the size of the economy.”
Lagarde said the IMF’s forecast of 1.5% growth next year was based on a smooth exit from the EU. Her remarks were seized upon by the chancellor, Philip Hammond, as evidence that the UK had to strike a deal that would safeguard jobs and prosperity.
“As the IMF has said, no deal would be extremely costly for the UK as it would be for the EU,” Hammond said. “Despite contingency planning, it would put at risk the significant progress made over the past 10 years in repairing the economy.”
No 10, however, pointedly refused to endorse Hammond’s gloomy predictions. When asked about what he had said, her spokesman referred to what Theresa May told the BBC in an interview broadcast earlier: “The PM said very clearly that she believes our best days are ahead of us and that we will have plans in place for us to succeed in all scenarios.”
The IMF’s warning came in the preliminary findings of its annual health check of the UK economy. The Washington-based organisation, which monitors the global economy and lends to troubled countries, will flesh out precise details of the size of a UK recession in the event of a disorderly Brexit when it publishes the final report in November.
Speaking at a press conference at the Treasury, Lagarde took issue with Brexit supporters who have said the UK would thrive if it left the EU without a deal and then traded on World Trade Organization terms.
“Our projections assume a timely agreement with the EU on a broad free-trade pact and a relatively smooth Brexit process after that. A more disruptive departure will have a much worse outcome. Let me be clear: compared with today’s smooth single market, all the likely Brexit scenarios will have costs for the UK economy, and to a lesser extent for the EU as well. The larger the impediments to trade in the new relationship, the costlier it will be. This should be obvious but it seems that sometimes it is not.”
The IMF came in for criticism from pro-leavers after giving a number of warnings about the consequences of Brexit in advance of the EU referendum in June 2016.
The pro-Brexit economist Patrick Minford, whose work is used by the European Research Group of Conservative MPs fighting against the prime minister’s Chequers plan, said the IMF had used the “wrong assumptions” about a no-deal scenario.
“Our trade with the EU will continue largely unimpeded. Also free trade with the rest of the world will boost our productivity and lower prices,” he said.
Lagarde said the impact of the vote had been to slow the economy, adding that it would have been better had the passion surrounding the Brexit debate been devoted to curing the UK’s productivity deficit with other leading economies.
Asked if she saw anything positive coming out of Brexit, Lagarde said: “I see a lot of negatives. If all the uncertainties were removed it would be better. It is bad for the economy to have this amount of uncertainty.”
The IMF’s latest contribution to the Brexit debate came at a time when May has been battling leading Eurosceptics over her Chequers proposals, warning that her plan for a deal with Brussels is the only option. She told the BBC on Monday it was either her deal or no deal.
Lagarde said progress had been made in preparing the UK for life outside the EU. “Nevertheless, the range of issues that remains to be addressed is daunting and the time left to accomplish them may be very short.” Ideally, she added, the transition period would be longer than the 20 months agreed between London and Brussels.
The IMF said UK growth has already dropped and business investment has been lower than would be expected since the EU referendum two years ago.
Over time, new trade agreements with countries outside the EU could eventually reduce some of the losses for the UK, it said, adding: “However, such agreements are unlikely to bring sufficient benefits to offset the costs imposed by leaving the EU.”
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