IMF cuts UK's 2017 growth forecast again

Wednesday 12th October 2016 06:36 EDT

The International Monetary Fund has cut UK's growth forecasts again on the back of the Brexit vote. Soon after the referendum, the IMF cut its 2016 GDP growth forecast from 1.9 per cent to 1.7 per cent and the 2017 forecast from 2.2 per cent to 1.3 per cent. Last week it trimmed the 2017 forecast further to 1.1 per cent, although it has revised up this year’s growth forecast to 1.8 per cent on the back of stronger than expected growth in the second quarter of the year.

The Fund said it has also revised down its medium term GDP growth potential forecasts for the UK from 2.1 per cent to 1.9 per cent due to the expectation that lower migration, trade and capital flows would take a toll.

Survey results and some “hard” data from the Office for National Statistics since the vote has come in stronger than expected and City of London economists have been revising away their expectations that the UK will enter a new recession this year. The Bank of England is currently forecasting growth of 0.3 per cent in the third quarter of the year, following a 0.7 per cent expansion in the second quarter.

But the IMF said that growth is still likely to slow significantly over the next two years, as a consequence of uncertainty weighing on private firms’ investment and hiring. It added that consumer confidence was still likely to be negatively affected and that inflation would rise sharply to 2.5 per cent next year, thanks to the more than 10 per cent depreciation of sterling in the wake of the 23 June vote.

The Fund said its latest forecasts, which are close to those of the OECD’s latest projection update last month, were predicated on the assumption that the UK’s Brexit negotiations with the rest of the EU proceed smoothly and that there is only a “limited” increase in economic barriers.

“The unexpected vote for Brexit... leaves unclear the future shape of the United Kingdom’s trade and financial relations with the remaining 27 EU members, introducing political and economic uncertainties that threaten to dampen investment and hiring throughout Europe,” said the Fund’s economic counsellor Maurice Obstfeld. He added that the Brexit vote reflected growing resentment of cross-border migration, which has fuelled dangerous nationalist sentiment in Europe.

The Prime Minister Theresa May said that she would trigger the Article 50 exit procedure before March next year, but has still not outlined what kind of trade relations she hopes to secure for the UK with the rest of the EU. On the policy front, the IMF said that the Bank of England’s monetary stimulus since the Brexit vote was “appropriately geared” to supporting lending and that the Chancellor should consider a near-term discretionary easing of fiscal policy.

The Bank has indicated that it may cut interest rates again later this year, although stronger than expected surveys in August and September have prompted traders to reduce their wagers on such an outcome.

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