No possible Brexit deal as good for UK economy as staying in European Union, IMF's Lagarde says

Christine Lagarde also sought to scotch the idea, promoted by hardline Brexiteers, that crashing out of the EU next March will be a long-term economic benefit

Ben Chu
Economics Editor
Monday 17 September 2018 12:54 BST
Christine Legarde: “Whatever the deal is, it will not be as good as it is at the moment”

No conceivable Brexit deal will be as beneficial for the economy as staying in the European Union, the head of the International Monetary Fund has warned.

Christine Lagarde, the Fund’s managing director, made the comments unveiling the Fund’s annual Article IV overview of the UK economy at the Treasury on Monday in London.

“Whatever the deal is will not be as good as it is at the moment,” she said.

The Bank of England’s Governor, Mark Carney, gave a briefing to the Cabinet last week in which he reportedly said that the adoption of the Prime Minister’s Chequers Brexit plan could boost the economy by around 1 per cent.

Ms Lagarde also sought to decisively scotch the idea, promoted by hardline Brexiteers, that crashing out of the EU next March will be a long-term economic benefit.

A group called Economists for Free Trade presented work last week suggesting that leaving the EU without a trade deal and trading on World Trade Organisation rules would boost the economy by £1.1 trillion over 15 years.

“Let me be clear, compared with today’s smooth single market, all the likely Brexit scenarios will have costs for the economy and to a lesser extent as well for the EU,” she said.

“The larger the impediments to trade in the new relationship, the costlier it will be,” she said.

“This should be fairly obvious, but it seems that sometimes it is not.”

The IMF’s intervention was seized upon by the Best for Britain group, which is pushing for a popular referendum on the final Brexit deal.

“The IMF report proves beyond doubt that the Tories’ plans would act as a sledgehammer to the UK economy. The substantial costs would weigh disproportionately on those with the least,” said the Labour MP David Lammy.

“The Prime Minister might try to trumpet this report as a victory for her Chequers plan, but doing so would be to deceive the British people.”

In its Article IV report the IMF did not provide any specific estimate of the damage of a no-deal Brexit – and Ms Lagarde would not be drawn on the question of whether it could result in recession – but the IMF said that it would result in a “significantly worse” outcome for the UK economy than its current forecast of 1.5 per cent growth in 2019, which is predicated on an orderly exit and a transition period where the UK effectively remains in the customs union and single market.

The Fund said that Brexit was also likely to hit government tax revenues, putting pressure on the public finances. It noted that 1 per cent fall in GDP tends to lead to a 0.4 per cent increase in the deficit.

“If Brexit disproportionately affects relatively tax-rich sectors like finance, the revenue impact could be even larger,” it said.

The IMF also stressed the limited time available to prepare for the UK’s departure on 29 March 2019, highlighting necessary preparation for customs capacity and establishing new domestic regulatory agencies.

“The range of remaining issues to prepare for Brexit is daunting, underscoring the importance of securing an implementation period,” it said.

In a no-deal scenario the UK would need to negotiate more than 50 existing EU trade deals for the UK alone merely to stand still on trade. “That is a heck of a lot of work,” said Ms Lagarde.

The Fund also argued that Brexit had already damaged the UK economy through higher inflation in the wake of sterling’s sharp fall after the 2016 referendum and also by curbing business investment, while higher exports had not offset the damage.

“Growth fell to about 1.75 per cent in 2016-17, moving the United Kingdom from the top to near the bottom of the G7 growth tables,” it said

The Chancellor, Philip Hammond, has been fighting the idea that no-deal would be tolerable for the UK economy.

Introducing Ms Lagarde at the Treasury, he said: “The IMF are clear today that no-deal would be extremely costly for the UK...That is why it is so important for people up and down this country, that we reach a negotiated agreement on our future relationship over the coming weeks.”

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