The International Monetary Fund (IMF) said on Monday that while Europe’s economy is strengthening, Brexit could cause prolonged policy and economic uncertainty for both the UK and the European Union.
The IMF’s latest regional economic outlook said there would be “significant negative impact on economic activity” if no deal is reached, with a notable increase in trade barriers, potentially accompanied by disruption of services in various sectors.
The report, which looks at more than 40 countries, said the European recovery is spilling over to the rest of the world, contributing significantly to global growth.
In the euro area, growth has been revised up to 2.1 per cent for 2017, from 1.7 per cent in the April report, and to 1.9 per cent for 2018 from 1.6 per cent in April.
In contrast, growth in the United Kingdom is projected to slow to 1.7 per cent in 2017 and 1.5 per cent in 2018, as Brexit weighs on growth.
The deputy director of the IMF’s european department, Joerg Decressin, told Reuters today that the IMF’s expectation remained that a transition deal would be reached. He said its economists have not run any “no deal” forecasts but a “disruptive” Brexit is likely to have a damaging impact.
The main uncertainty remains Brexit and what kind of trade relationship the UK can set up when it leaves the EU with the 27 remaining countries, he said.
Decressin also told Reuters that hard border controls and reversion to World Trade Organisation tariffs would cause damage on both sides of the channel.
“Under such circumstances, our concern is that economic growth will suffer, especially in the UK, but also the euro area.
“We are then possibly looking at appreciably lower growth than we presently project,” he said.
Decressin also argued that the Bank of England’s move to raise its base rate for the first time in a decade to 0.5 per cent was justified by inflation hitting three per cent.
The IMF’s warning comes at a delicate time for Number 10, with the government in turmoil as 40 MPs agreed to sign a letter of no confidence in Theresa May.