The International Monetary Fund has predicted the UK will be the fastest growing of the G7 leading industrial countries this year and accepted that its prediction of a post-Brexit-vote financial crash has proved to be overly pessimistic.

IMF left shamefaced after peak pessimism over Brexit vote Read more

But while the Washington-based IMF said Britain would have a “soft landing” in 2016 with growth of 1.8%, it stuck to its view that the economy would eventually suffer from the shock EU referendum result and said expansion next year would be just 1.1% – lower than it expected in the immediate aftermath of the Brexit vote.

Maurice Obstfeld, the IMF’s economic counsellor, said the fund had been right to warn about the risks of Brexit but added: “We are looking at a soft landing for 2016. We are happy about the outcome.”

Looking further ahead, Obstfeld said the uncertainty about the divorce settlement between Britain and the EU would make businesses more cautious and warned that the fall in sterling – which hit a 31-year low on Tuesday – would hit living standards.

The pound sank to $1.274, its lowest level since June 1985. However, the decline provided another boost to companies with sales in dollars and the FTSE-100 soared 90 points to 7074 - its highest close since April 2015’s record high of 7104. The FTSE 100 index is now up nearly 28% since February and has climbed 12% since referendum day on 23 June.

Philip Hammond, the chancellor, said the UK economy had shown its resilience since the referendum but there was no room for complacency.

“There are still challenges ahead, as the IMF note in their estimate for growth in 2017. That is why I stand ready to take action to support our economy through any period of turbulence and will continue to pursue the long-term goals of fiscal consolidation and improved productivity.”

The IMF used its half-yearly world economic outlook (WEO) to warn not just about the impact of the referendum result on the UK and the wider eurozone economies, as well as the weak growth and uneven division of the fruits of growth that caused 52% of those who votedto end Britain’s 43-year membership of the EU.

Obstfeld said: “Taken as a whole, the world economy has moved sideways. Without determined policy action to support economic activity over the short and longer terms, sub-par growth at recent levels risks perpetuating itself through the negative economic and political forces it is unleashing.”

He said slow growth and rising inequality was having a political impact: “The slow and incomplete recovery from crisis has been especially damaging in those countries where the distribution of income has continued to skew sharply toward the highest earners, leaving little room for those with lower incomes to advance.

“The result in some richer countries has been a political movement that blames globalisation for all woes and seeks somehow to wall off the economy from global trends rather than engage cooperatively with foreign nations. Brexit is only one example of this tendency.”

The WEO predicted global growth of 3.1% this year, slightly lower than the 3.2% recorded in 2015. It expects a modest acceleration to 3.4% in 2017.

Obstfeld said the Brexit vote left unclear the future shape of the UK’s trade and financial relations with the other 27 EU member states, with a likely impact on investment and hiring across Europe.

“Alongside economic anxiety and other factors, the Brexit vote reflects a resentment of cross-border migration that has fuelled nationalist sentiment in Europe and called into question the way forward for EU integration,” Obstfeld said.

“Similar tensions afflict the US political scene, where anti-immigrant and anti-trade rhetoric have been prominent from the start of the current presidential election round. Across the world, protectionist trade measures have been on the rise.”

Apart from the sharp depreciation of the pound, the IMF said financial markets’ reaction to Brexit vote had “generally been contained”, with shares up and the appetite for taking risk recovering after an initial plunge.

The WEO noted that manufacturing in the UK had bounced back after falling steeply in July and spending in the shops had held up. But it cautioned that economic data since the referendum had been limited and said the fall in sterling would prompt inflation to rise from 0.7% this year to 2.5% in 2017.

“In the United Kingdom, slower growth is expected since the referendum as uncertainty in the aftermath of the Brexit vote weighs on firms’ investment and hiring decisions and consumers’ purchases of durable goods and housing. Growth is forecast at 1.8% in 2016 and 1.1% in 2017, based on the assumptions of smooth post-Brexit negotiations and a limited increase in economic barriers.”

The IMF cut its medium-term growth forecast for the UK from 2.1% to 1.9% as a result of what it assumes will be barriers to trade, migration and capital flow.

The IMF also backed Hammond’s hints of extra government spending for public investment in next month’s autumn statement.

Noting that the Bank of England’s package of measures in August was aimed at boosting confidence and limiting the downside risks to the economy, the IMF said: “As greater clarity emerges on the macroeconomic impact of the Brexit vote, the need for further near-term discretionary fiscal policy easing and the appropriateness of the medium-term deficit target should be assessed, possibly in the context of the forthcoming November fiscal review.”