Predictions revised down from April as IMF says EU referendum result has ‘thrown a spanner in the works’ of global recovery

The International Monetary Fund has slashed its forecast for UK growth next year after warning that the decision to leave the EU had damaged the British economy’s short-term prospects and “thrown a spanner in the works” of the global recovery.

The IMF, which voiced strong misgivings about a vote for Brexit before the EU referendum, said it expected the UK economy to grow by 1.3% in 2017, 0.9 percentage points lower than an estimate made in its World Economic Outlook (WEO), in April.

While the fund is ruling out a full-blown recession, the analysis by one of the leading global economic bodies underlines the financial challenges facing Theresa May’s government during a period when slower growth will lead to lower tax receipts and a bigger budget deficit.



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On Wednesday in Berlin, the prime minister will hold talks with the German chancellor, Angela Merkel. Both are keen to minimise the economic fallout of Brexit. Germany, with its heavy reliance on exports, is seen by the IMF as the most vulnerable eurozone country following Britain’s vote.

May is expected to warn that she needs time to consult with the governments of Scotland, Wales and Northern Ireland, as well as industry sectors, before starting formal negotiations with Brussels. Tomorrow she goes to France for a meeting with the president, François Hollande, where she will deliver a similar message about the need to resist triggering article 50 until Britain is fully prepared for talks.

May and her ministers are keen to talk up the prospects for the economy, with the upbeat response from the Treasury to the IMF report contrasting with the pessimistic tone that had been adopted under George Osborne in the weeks leading up to the EU referendum.

A Treasury spokesman said overtures from Australia about a trade deal and the willingness of Softbank to pay £24bn for the technology firm ARM showed the UK could make a success of Brexit. “The decision to leave the EU marks a new phase for the British economy, but our message is this: our country remains open for business. We are the same outward-looking, globally minded, big-thinking country we have always been.”

The IMF urged policymakers in the UK and rest of the EU to end the uncertainty. “Of primary importance is a smooth and predictable transition to a new set of post-exit trading and financial relationships that as much as possible preserves gains from trade between the UK and the EU.”



The IMF said it had cut its forecasts for the global economy due to the likely knock-on effect of the vote on other countries, particularly in Europe.

Maury Obstfeld, the IMF’s economic counsellor, said: “The first half of 2016 revealed some promising signs – stronger than expected growth in the euro area and Japan, as well as a partial recovery in commodity prices that helped several emerging and developing economies.

Facebook Twitter Pinterest Maury Obstfeld said the IMF had been prepared to upgrade global growth projections for 2016-17 prior to the Brexit vote. Photograph: Getty Images

“As of 22 June [the day before the referendum], we were therefore prepared to upgrade our 2016-17 global growth projections slightly. But Brexit has thrown a spanner in the works.”



The IMF predicted global growth of 3.1% in 2016 and 3.4% in 2017, both of which were 0.1 points lower than forecast in April. Britain is still expected to be the second fastest growing economy in the G7 this year – behind the US, despite having its growth forecast for 2016 trimmed by 0.2 percentage points to 1.7%.



The IMF believes that next year the UK will have similar growth rates to Germany – the eurozone economy most affected by the Brexit-induced slowdown – and France. Germany’s growth is now estimated at 1.2% in 2017, a fall of 0.4 points.



It said: “The vote in the UK in favour of leaving the EU adds significant uncertainty to an already fragile global recovery. The vote has caused significant political change in the UK, generated uncertainty about the nature of its future economic relations with the EU, and could heighten political risks in the union itself. Continuing uncertainty is likely to weigh on consumption and especially investment.”



The WEO update said there was a risk that the impact of the UK’s decision to leave could prove worse than expected. “With Brexit still very much unfolding, the extent of economic and political uncertainty has risen, and the likelihood of outcomes more negative than the one in the baseline has increased.”



The IMF outlined two alternative scenarios to its forecast, one moderately worse, one significantly. However, Obstfeld said the resilience of financial markets since 23 June meant that the fund was putting “less weight” on gloomy forecasts.



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A forecast from the European commission, however, was less sanguine. In its first post-Brexit assessment, the commission said the UK would, at best, grow by 1.1% in 2017, but there was a risk that the economy could contract by 0.3%.



The shadow chancellor, John McDonnell, said of the announcement: “Today’s report from the IMF is another blow for the government and further highlights that they had no plan whatsoever for after a Brexit vote.”



Matt Whittaker, chief economist at the Resolution Foundation, said that if the IMF forecast were right, the UK economy would be £21bn smaller than thought: “A £21bn [cut] in the … economy alone would reduce the tax take by £150m a week.”



The Adam Smith Institute said the “rebooting” of the economy after Brexit should include the scrapping of corporation tax, abolition of subsidies for farmers, and protection of Britain’s fishing waters.