IMF downgrades UK outlook and warns on spending cuts

In its annual review of the UK economy, the IMF said UK gross domestic product (GDP) looked set to expand by 1.6% this year, knocking back its prediction of 1.7% growth from October.

However, it stood by previous forecasts for GDP to slow to 1.5% in 2018, as Brexit uncertainty and the inflationary squeeze on household spending power puts the brakes on the UK economy.

The Washington DC-based organisation said firms are likely to continue deferring investment decisions until there is greater clarity on the UK’s future trading relationship with the European Union.

Speaking in London, IMF managing director Christine Lagarde said even though Britain has not yet left the EU, it is already having an adverse impact on the economy.

She said: “Since the start of this year, growth has slowed notably. The significant depreciation of sterling that followed the referendum has pushed inflation over 3%, squeezing real incomes and private consumption.

“Companies are also delaying some investment decisions until they have greater clarity about post-Brexit trade rules.”

She added that Britain is likely to face significant fiscal pressures, and a slowing economy will mean less cash for public spending,

“These challenges are likely to become even more acute if trade barriers further reduce productivity.

“Taken together, these developments mean the UK may in the future about the size of the public sector and the mode of delivery and financing of public services.”

While the IMF welcomed “recent progress” in the Brexit negotiations, it flagged tough choices for the Government on the road ahead, as it grapples with a potential loss of tax revenues from the financial sector and slower productivity growth.

The IMF’s outlook follows a bleak update on the nation’s economic prospects from Britain’s fiscal watchdog in November, which flagged the damaging effects of “stubbornly flat” productivity growth and weaker business investment.

The Office for Budget Responsibility (OBR) said the Government may not eradicate the deficit before 2031, as it slashed GDP forecasts from 2% to 1.5% for this year, from 1.6% to 1.4% in 2018, and from 1.7% to 1.3% in 2019.

Responding to the IMF study, Chancellor Philip Hammond said it underlined the need to avoid a “cliff-edge” Brexit.

He said: “One of the biggest boosts we can provide to the economy - the economy of the UK and the economy of the EU27- is making early progress on delivering certainty and clarity about our future relationship with a time-limited implementation period agreed at the earliest opportunity.”