The IMF released a grim report card on the UK's economy, mainly thanks to Brexit

  • The International Monetary Fund (IMF) released its outlook for the U.K. economy Wednesday, projecting GDP growth for 2018 at 1.5 percent — down from 1.6 percent in 2017
  • Recent progress in Brexit talks was welcome, the Fund noted, but added that there was a very long list of tasks ahead with a very ambitious time frame
Christine Lagarde
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Christine Lagarde

The International Monetary Fund (IMF) released its outlook for the U.K. economy Wednesday, projecting GDP growth for 2018 at 1.5 percent — down from 1.6 percent in 2017 — citing Brexit uncertainty as the main weight on growth.

"Despite a strong recovery in global growth and strong macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand," the IMF said in its concluding statement of the 2017 Article IV mission, an annual health-check on the country's economy.

"Our forecast for 2018 is 1.5 percent as uncertainty about the shape of Brexit persists, most likely, and inflation remains above target," IMF Managing Director Christine Lagarde said in London Wednesday morning. "The less uncertainty, the greater the upside risk — the more uncertainty, the more that forecast is at risk."

Amid largely uniform global growth, "The U.K. economy is losing out as a result of the (Brexit) decision — higher inflation, pressure on wages, delayed investment simply as a result of the uncertainty," Lagarde added. The IMF in September forecast global growth for 2017 and 2018 at 3.6 percent and. 3.7 percent, respectively.

Recent progress in Brexit talks was welcome, the Fund noted, but added that there was a very long list of tasks ahead with a very ambitious time frame, including reaching a trade deal with the EU, negotiating new arrangements with some 60 countries, boosting human and IT resources in customs and other areas, and translating thousands of pages of EU law into U.K. domestic statute.

UK productivity 'extremely weak'

The IMF also expects inflation to ease in the coming months, though not below the Bank of England's target level of 2 percent. Inflation reached 3.1 percent for November, revealing a continued squeeze on household income and consumption.

Productivity growth also remains a deadweight on the country, and was described in the Fund's statement as "extremely weak." Any new barriers to the cross-border flow of goods and labor would continue to negatively affect productivity performance, the Fund warned.

Lagarde described the U.K. as "underinvested" when it came to infrastructure and innovation, and said it "fell short" in human capital development. Business investment is at 2.1 percent, a figure she believed should be at 6 percent amid the current global upswing.

The U.K.'s public debt sits at a whopping 87 percent of GDP, high by international standards, and risks amplifying the impacts of further Brexit uncertainty. On a more positive note, however, the IMF praised the British government for having managed to substantially reduce its deficit since the financial crisis through sustained consolidation.

Asked for her thoughts on critics who characterized the IMF as "too gloomy" in its forecasts, Lagarde had frank words.

"Our forecast actually turned out to be the reality of the economy, which is one where sterling has depreciated, inflation has gone up, wages have increased as a result, and investment has been slowed down," the managing director said.

"Regrettably, the numbers we are seeing delivered today are actually proving the point people made a year and a half ago when people said 'you are too gloomy, you are one of those experts'," Lagarde recalled. "Unfortunately, we were not too gloomy — we were pretty much on the mark."