Lagarde Sees Brexit Weighing Heavily on British Economy

The International Monetary Fund released its outlook for Britain’s economy Wednesday, projecting GDP growth for 2018 at 1.5%—down from 1.6% in 2017—citing Brexit uncertainty as the main weight on growth.

“Despite a strong recovery in global growth and strong macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand,” the IMF said in its concluding statement of the 2017 Article IV mission, an annual health-check on the country’s economy, CNBC reported.

“Our forecast for 2018 is 1.5% as uncertainty about the shape of Brexit persists, most likely, and inflation remains above target,” IMF Managing Director Christine Lagarde said in London Wednesday morning. “The less uncertainty, the greater the upside risk—the more uncertainty, the more that forecast is at risk.”

Amid largely uniform global growth, “the UK economy is losing out as a result of the (Brexit) decision—higher inflation, pressure on wages, delayed investment simply as a result of the uncertainty,” Lagarde added.

“The UK economy is already losing out as a result of this decision,” she said at a news conference alongside Finance Minister Philip Hammond. “That narrative we identified as a potential risk in May 2016 is actually being rolled out as we speak. It’s not experts talking—it is the economy demonstrating that,” Lagarde said.

Before the June 2016 referendum, Lagarde had said Brexit would have “pretty bad to very, very bad” consequences for Britain, angering Brexit backers who viewed the body as exceeding the limits of its expertise.

Now firms were delaying investment until they had more clarity about future trade rules, and she urged Britain and the EU to reach a deal soon on transitional arrangements for March 2019.

Recent progress in Brexit talks was welcome, the fund noted, but added that there was a very long list of tasks ahead with a very ambitious time frame, including reaching a trade deal with the EU, negotiating new arrangements with some 60 countries, boosting human and IT resources in customs and other areas, and translating thousands of pages of EU law into UK domestic statute.

 UK Should Raise More Money

In its report, the IMF said Britain may need to raise more money from taxes to bring down its budget deficit after relying heavily on squeezing public spending. “Deficit reduction since the financial crisis has relied mostly on spending measures,” the IMF said.

“While the government should continue to seek the best value for money in public spending, a more balanced approach to deficit reduction may be called for in future,” it said, Reuters reported.

The impact of Brexit on the economy and Britain’s low productivity growth could hit tax revenues, while demands on public spending would increase as the country’s population grows older. “Under these circumstances, greater reliance on revenue measures for consolidation (of the budget) than in recent years may be warranted,” the report said.

Hammond said he shared the IMF’s concerns about Britain’s high levels of public debt.

The IMF in September forecast global growth for 2017 and 2018 at 3.6% and. 3.7%, respectively.

 UK Productivity Extremely Weak

The IMF also expects inflation to ease in the coming months, though not below the Bank of England’s target level of 2%. Inflation reached 3.1% for November, revealing a continued squeeze on household income and consumption.

Productivity growth also remains a deadweight on the country, and was described in the fund’s statement as “extremely weak”. Any new barriers to the cross-border flow of goods and labor would continue to negatively affect productivity performance, the fund warned.

Lagarde described UK as “underinvested” when it came to infrastructure and innovation, and said it “fell short” in human capital development. Business investment is at 2.1%, a figure she believed should be at 6% amid the current global upswing.

The UK’s public debt sits at a whopping 87% of GDP, high by international standards, and risks amplifying the impacts of further Brexit uncertainty. On a more positive note, however, the IMF praised the British government for having managed to substantially reduce its deficit since the financial crisis through sustained consolidation.

“Regrettably, the numbers we are seeing delivered today are actually proving the point people made a year and a half ago when people said ‘you are too gloomy, you are one of those experts’,” Lagarde recalled. “Unfortunately, we were not too gloomy—we were pretty much on the mark.”