IMF cuts UK growth on Brexit clouds

Britain has suffered the biggest downgrade of economic growth projections by the IMF for the world’s rich nations this year, prompting the finance ministry to renew its call for a smooth exit from the EU.

Britain’s economy now looks set to grow by 1.7% this year, down from a forecast made in April of 2% but still higher than growth in France, Italy and Japan, the IMF said. The IMF said its downgrade reflected Britain’s weaker-than-expected growth in the early part of this year.

“The ultimate impact of Brexit on the UK remains unclear,” IMF chief economist Maurice Obstfeld said.

The IMF in April raised its forecasts for British growth after the economy withstood the initial shock of the referendum decision in June last year to leave the EU.

However, the world’s fifth-biggest economy grew by just 0.2% in the first quarter of 2016 compared with the last three months of 2016 as accelerating inflation — caused in large part by the fall in the value of the pound since last year’s Brexit vote — prompted consumers to rein in their spending.

And British households’ financial situation has deteriorated at the fastest rate in three years this month, as families increasingly shy away from big purchases like cars, holidays and household appliances, a survey showed.

Financial data company IHS Markit said its monthly Household Finance Index dropped to its lowest since July 2014, reflecting an ongoing squeeze on household incomes as inflation rises faster than wages.

“There are signs that squeezed household budgets and worries about earnings have started to spill over to consumer spending patterns,” said Tim Moore, economist at IHS Markit.

Official data due today is forecast to show that economic growth picked up only slightly in the three months to the end of June. Analysts see an expansion of 0.3% compared with 0.2% in the first quarter — half Britain’s long-term average growth rate. Subdued growth may stay the hand of the Bank of England when it considers next week whether to raise interest rates for the first time in a decade. Some policymakers have called for a rate hike due to worries of persistent price pressures.

British chancellor Philip Hammond has stressed the need for a transition deal to ease Britain out of the EU, angering some Brexit campaigners. A spokesman for the Treasury said the weaker growth seen by the IMF was a reminder of the need to smooth Brexit as much as possible.

“This forecast underscores exactly why our plans to increase productivity and ensure we get the very best deal with the EU, are vitally important,” the spokesman said.

Reuters


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