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IMF says no-deal Brexit risks two-year recession for UK

IMF says no-deal Brexit risks two-year recession for UK

Britain’s already struggling economy would be pushed into a two-year recession by a no-deal Brexit, the International Monetary Fund has warned.

Ahead of Theresa May’s plea to EU leaders for a further delay to Britain’s departure, the IMF used a downbeat half-yearly assessment of the global economy to predict that the UK economy could be 3.5% smaller than expected by 2021 if trade barriers were swiftly erected.

The World Economic Outlook – completed in March before the latest developments in Brexit – predicted UK growth of 1.2% in 2019 on the assumption that a Brexit deal is done.

Growth in 2020 has also been revised down – by 0.1 points to 1.4% – since the fund’s last WEO in October, but the IMF said its projections were surrounded by uncertainty.

It said there were alternative no-deal scenarios in which the UK would be hit by trade barriers, customs delays, barriers to financial services firms and the loss of preferential access to non-EU countries under trade deals negotiated by Brussels. The impact of these would be enough to cause output to decline in 2019 and 2020.

It stressed that “a no-deal Brexit that severely disrupts supply chains and raises trade costs could potentially have large and long-lasting negative impacts on the economies of the United Kingdom and the European Union”.

The Washington-based IMF said some of the damage would be mitigated if the two sides recognised existing product standards, at least temporarily.

“The extent of the border disruption and the tightening of financial conditions are also very uncertain, as is the degree to which financial sector output would decline in the long term due to the loss of passporting rights.”

Despite the pick-up in wage growth prompted by the lowest unemployment since the mid-1970s, the IMF said Brexit uncertainty meant that the Bank of England should be wary of raising interest rates and the chancellor, Philip Hammond, should be prepared to cut taxes and raise public spending if growth slowed markedly.

The WEO said the EU could suffer a 0.5% drop in output by 2021 after a no-deal outcome, and was already suffering from a period of weak activity.