The International Monetary Fund singled Britain out as a “notable exception” to an improving global economic outlook on Tuesday, as it cut its forecast for UK growth and said the long-term negative effects of Brexit were beginning to show.
In its twice-yearly World Economic Outlook, the IMF reduced the UK’s growth forecast for 2017 by 0.3 percentage points, to 1.7 per cent — well below the average growth rate in other advanced economies. The fund also sharply reduced its estimate of the UK’s long-term growth outlook.
The IMF’s forecasts are slightly more optimistic than the current consensus, but are unlikely to offer cheer to Philip Hammond, the chancellor, as he travels to Washington for the annual IMF meetings this week. Eurosceptics have called for Mr Hammond to be sacked, believing that his pressing for a long post-Brexit transition period from EU membership amounts to effective resistance to leaving the bloc.
Maurice Obstfeld, chief economist at the IMF, said the reduction in the fund’s long-term outlook for the UK from an annual growth rate of 1.9 per cent to 1.7 per cent was a direct consequence of leaving the EU.
“We forecast in the pre-referendum period, as did others, there would be long run negative effects on the British economy,” he said. “I think we’re starting to see those.”
Michael Gove, UK environment secretary, has repeatedly criticised the Washington-based IMF for predicting that Brexit would hurt the UK economy.
When the fund first estimated the 2017 growth of the UK economy in 2012, it projected an annual expansion of 2.84 per cent. Subsequent forecasts became more pessimistic, and two months before last June’s EU referendum, the fund predicted 2.2 per cent growth.
After the UK voted to leave the EU, however, the IMF slashed its forecast for 2017 to 1.1 per cent. But as the economy remained resilient in the second half of last year, the fund was forced to eat humble pie, almost doubling the estimate to 2.1 per cent earlier this year.
While the IMF expects the global economy to accelerate next year, it is predicting a further slowdown in the UK, to 1.5 per cent growth, for 2018. The IMF’s projection is broadly in line with consensus, but significantly more optimistic than the recent 1 per cent growth forecast by the Organisation for Economic Co-operation and Development.
The IMF’s cut to its long-term growth assumptions will pile pressure on the UK’s Office for Budget Responsibility to do the same. Treasury officials have already said Mr Hammond is facing “a bloodbath” in the public finances in his Budget next month, as weak economic forecasts derail the government’s plans.
The IMF maintained that Mr Hammond will be able to keep to his self-imposed rule to bring borrowing down to 2 per cent of national income by 2020-21. But the fund increased its forecasts for the deficit in Tuesday’s report, saying it now expected the UK’s structural deficit to be 1.2 per cent of national income in 2021.
The fund said on Tuesday that in contrast to the UK, most of the world’s advanced economies were currently enjoying the best period of growth since the financial crisis.
“Growth in most of the other advanced economies, with the notable exception of the UK, picked up in the first half of 2017 from its pace in the second half of 2016, with both domestic and external demand contributing,” the IMF said in its World Economic Outlook.
“The UK, where the strong depreciation of the pound since last summer has passed through into higher consumer prices, is an exception to this pattern [of low inflation in other countries].”
The IMF said the squeeze on household finances in the UK had hit growth in the first two quarters of this year, and “the medium-term growth outlook is highly uncertain and will depend in part on the new economic relationship with the EU and the extent of the increase in barriers to trade, migration and cross-border financial activity”.
Mr Obstfeld said he sympathised with the “harsh trade off” facing the Bank of England as it ponders whether to raise interest rates at its November meeting.
“It’s hard to judge to what extent above target inflation could feed through into nominal wages and complicate things,” he said. “At some level the BoE is in the position you don’t want to be in as a central banker where you’re facing a negative supply shock which directly brings your inflation mandate into conflict with what is possibly better in terms of economic growth.”