International Monetary Fund warns of hit to UK GDP in no-deal Brexit

Chancellor Philip Hammond holding his red ministerial box outside 11 Downing Stree before heading to the House of Commons to deliver his Budget Photo: PA / Stefan Rousseau - Credit: PA Wire/PA Images

A no-deal Brexit could cut the UK’s predicted GDP by 3.5% by 2021, the International Monetary Fund has warned.

A no-deal departure from the EU which severely disrupts supply chains and raises trade costs would have ‘large and long-lasting negative impacts’ on the UK and EU economies, with Britain the hardest hit, said the IMF.

In its twice-yearly World Economic Outlook, the global organisation downgraded last October’s forecast for UK GDP growth from 1.5% to 1.2% for 2019 and from 1.5% to 1.4% for 2020.

But it warned that the forecasts assume an orderly withdrawal from the EU with a deal and a gradual transition to the new regime. The actual outcome is ‘surrounded by uncertainty’ over whether a deal would be reached, it said.

Downward revisions since October reflected ‘the negative effect of prolonged uncertainty about the Brexit outcome’, only ‘partially offset’ by the fiscal stimulus provided by chancellor Philip Hammond in his Budget, said the report.

The IMF found that UK GDP would be 3.5% lower and EU GDP 0.5% lower in 2021 following a no-deal Brexit than it would be if an agreement was reached.

Setting out the long-term effects of no deal, the report said: ‘First, higher tariffs and non-tariff barriers significantly reduce the returns to capital in the United Kingdom and the European Union.

‘Consequently, firms’ desired capital stock falls, reducing potential output in the long term. The impact, not surprisingly, is much larger in the United Kingdom.

‘Second, stricter immigration policies reduce the size of the labour force in the United Kingdom and expand the size of the labour force in the European Union.

‘In combination, these effects lower UK potential output by almost 3% in the long term, relative to the current baseline. In the case of the European Union, the decline in potential output is about 0.3%.’

The IMF called for a ‘cautious’ approach to interest rates from the Bank of England in response to the uncertainty.

It warned that Hammond should be prepared to slow the pace of efforts to drive down the deficit if growth slows materially.

Uncertainty around Brexit remained a risk to the wider world economy, said the IMF, warning that a no-deal outcome was one of the unpredictable factors that could trigger a ‘sharp deterioration’ in market sentiment.