IMF warns of 'substantial' economic damage from Brexit

International body is latest to highlight economic damage leaving the EU would inflict on Britain, citing falls in house prices and shares and a possible "technical recession"

Ben Chu
Economics Editor
Friday 13 May 2016 07:59
IMF Chief Lagarde on Brexit

Brexit would have “negative and substantial” long-term economic consequences for the UK, the International Monetary Fund has warned.

And Christine Lagarde, the managing director of the Fund, has echoed the words of the Bank of England Governor yesterday in suggesting that a vote to leave could potentially trigger an immediate technical recession.

It is the latest international body, following the OECD, to state unequivocally that leaving the EU would be damaging for Britain’s economy.

“A vote for exit would precipitate a protracted period of heightened uncertainty, leading to financial volatility and a hit to output” the Fund argues in its latest annual Article IV analysis summary of the UK economy today. Among the impacts it cited a possible "sharp drop in equity and house prices [and] increased borrowing costs for households and businesses".

Christine Lagarde, the managing director of the IMF, told journalists that Brexit would likely lead to “lower output, lower growth and higher domestic prices” and that the outcomes would range from “pretty bad to very, very bad”.

Referring to two consecutive quarter of negative growth, she added: "A technical recession is one of the probabilities of the downwide risk scenario in the event of a leave vote."

The IMF report added that fears of Brexit “already appears to be having an impact on investment and hiring decisions, with recent surveys of economic activity falling to their weakest levels in three years.”

The Leave campaign dismissed the IMF’s warning. The former Conservative Chancellor, Lord Lamont, said: “This daily avalanche of institutional propaganda is becoming ludicrous and pitiful. Important institutions are being politicised and used to make blood-curdling forecasts.”

Priti Patel MP, who is backing the leave campaign, said: “It appears the Chancellor is cashing in favours to Ms Lagarde in order to encourage the IMF to bully the British people”.

For her part, Ms Lagarde strongly denied the report's conclusions on Brexit had been “influenced“ by the Treasury. ”Heck no! If you are suggesting that you don't know the IMF“ she said.

Ms Lagarde added that the IMF had to analyse the economic impact of Brext because of its implications for the global economy.

“I don't think that in the last six months I have visited a country anywhere in the world where I have not been asked 'what will be the economic consequences of Brexit?' So it is out of duty and loyalty to our mission that we have to study that in depth."

The report adds support to fears that London’s status as a global financial centre could be imperilled by Brexit as UK-based firms may lose their “passporting” rights to provide financial services to the rest of the EU and banks and clearing houses might move operations out of London.

The IMF itself has not yet released its own detailed statistical estimates of the potential size of the hit to the UK economy from leaving the EU. Those are expected to be released in the full Article IV document on 16 or 17 June - the week before the 23 June referendum vote.

But the Fund today notes that other analyses by the likes of the Treasury, PwC and the National Institute for Economic and Social Research have estimated the damage by 2030 at between 1.5 and 9.5 per cent of GDP relative to staying in.

It said the range of views mainly reflect differing assumptions about the UK’s trade relationship with the rest of the EU post-Brexit and stresses that the overwhelming consensus of experts is that the impact of departure would not be positive.

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