IMF warns about Brexit danger to UK economy

Ms Lagarde told a press conference she 'very, very much' hopes there is no Brexit

A possible Brexit and high household debt pose key risks to the recovery, the International Monetary Fund warned yesterday as its managing director Christine Lagarde said she “very, very much” hoped the UK remained within the European Union.

The IMF – whose former chief economist Olivier Blanchard clashed with Chancellor George Osborne in 2013 when he accused him of “playing with fire” over deficit reduction – stressed that the UK economy had performed strongly and “made considerable progress” in its latest assessment.

But it also flagged up several key risks, including the looming vote on Britain’s future in the EU – potentially in September next year which it believes could dent growth prospects. The IMF said “uncertainty associated with the outcome of the planned referendum on EU membership could weigh on the outlook”.

Ms Lagarde told a press conference she “very, very much” hopes there is no Brexit. “Certainty is always better than uncertainty,” she added.

The IMF also highlighted the risk of highly indebted people being vulnerable to “income and interest rate shocks”. Household debts peaked at close to 170 per cent of incomes on the eve of the credit crunch in 2007, and have since fallen back to around 144 per cent – an improvement but well above the levels seen at the turn of the millennium.

The organisation is also concerned about high house prices and a current account deficit – a measure of the UK’s trade and investment position with the rest of the world – that remains “strikingly large” at 3.6 per cent of GDP, despite recent improvement.

“Confidence shocks could reduce external capital flows into the UK, which could adversely affect growth,” the IMF said. Meanwhile a high fiscal deficit and debt levels “would constrain the space to respond proactively to future large negative growth shocks”.

The IMF’s report echoed recent warnings from the Bank of England’s Financial Policy Committee over the current account, while the Bank’s rate-setters are also concerned about the impact of interest rate rises on highly indebted borrowers.

The organisation said the Bank was right to hold interest rates at their record lows as undershooting its 2 per cent inflation target was potentially more damaging than overshooting. “Monetary policy should stay on hold until inflationary pressures are clearer,” it added.

Mr Osborne said that overall the report was the most positive since he became Chancellor in 2010. “They say our economy is much stronger, more resilient and has more jobs,” he commented.