The UK economy would rapidly start to contract in the event of a disruptive exit from the EU next spring, according to a stark International Monetary Fund report that highlights the recession risks of no deal.
Christine Lagarde, the IMF’s managing director, said there would be “dire consequences” from a disorderly exit but added that there would be costs to the UK under any outcome.
Expressing the IMF’s growing concern at the possibility of an acrimonious divorce next March, Lagarde said: “If that happened there would be dire consequences. It would inevitably have consequences in terms of reduced growth, an increase in the [budget] deficit and a depreciation of the currency.
“In relatively short order it would mean a reduction in the size of the economy.”
Lagarde said the IMF’s forecast of 1.5% growth next year was based on a smooth exit from the EU. Her remarks were seized upon by the chancellor, Philip Hammond, as evidence that the UK had to strike a deal that would safeguard jobs and prosperity.
“As the IMF has said, no deal would be extremely costly for the UK as it would be for the EU,”Hammond said. “Despite contingency planning, it would put at risk the significant progress made over the past 10 years in repairing the economy.”
The IMF’s warning came in the preliminary findings of its annual health check into the UK economy. The Washington-based organisation will flesh out precise details of the size of a UK recession in the event of a disorderly Brexit when it publishes the final report in November.
Theresa May has battled leading eurosceptics over her Chequers proposals, warning that her plan for a deal with Brussels is the only option. She told the BBC on Monday it was either her deal, or no deal.
The IMF said UK growth has already dropped and business investment has been lower than would be expected since the EU referendum two years ago. It warned that all Brexit outcomes would be worse for the UK than EU membership, while arguing for an agreement that “minimises the introduction of new tariff and non-tariff barriers [which] would best protect growth and incomes in the UK and EU”.
Over time, new trade agreements with countries outside the EU could eventually reduce some of these losses for the UK, it said, adding: “However, such agreements are unlikely to bring sufficient benefits to offset the costs imposed by leaving the EU.”