All likely Brexit outcomes will cost the UK economy, IMF warns

  • All "likely" Brexit outcomes will entail a financial hit for the U.K. economy, the International Monetary Fund (IMF) warned on Monday.
  • But, it said, a disorderly "no-deal" scenario — where Britain leaves the European Union without any kind of trading relationship in place — would be much worse.
  • The warning comes as negotiations between the U.K. and EU remain strained and key issues in the divorce are unresolved.

All "likely" Brexit outcomes will entail a financial hit for the U.K. economy, the International Monetary Fund (IMF) warned on Monday.

But, it said, a disorderly "no-deal" scenario — where Britain leaves the European Union without any kind of trading relationship in place — would be much worse.

"While all likely Brexit outcomes will entail costs for the U.K. economy by departing from the frictionless single market that now prevails, an agreement that minimizes the introduction of new tariff and non-tariff barriers would best protect growth and incomes in the U.K. and EU," the IMF said in its latest report on the outlook and risks to the world economy, published Monday.

The City or 'Square Mile' business district in central London.
Vladimir Zakharov | Moment | Getty Images
The City or 'Square Mile' business district in central London.

The warning comes as negotiations between the U.K. and EU remain strained and key issues in the divorce — such as the future of the border between Ireland and Northern Ireland and the degree of trading access that will exist post-Brexit — remain unresolved.

Making matters worse, Brexit supporters within the British parliament have rebelled against Prime Minister Theresa May's "Chequers plan," which lays out the U.K.'s future relationship with the EU and that would result in a "softer" Brexit and closer regulatory alignment with Europe.

The U.K. parliament has to ratify the final Brexit deal that is reached and, aside from rumblings of discontent among both so-called "Brexiteer" and "Remainer" MPs who could oppose the final deal. In addition, the other 27 member states of the EU have to agree to any final deal, adding further complexities and stumbling blocks to the process.

Against a backdrop of disagreements and political instability, the probability of a "no deal" scenario has looked more likely in recent weeks. For her part, May told the BBC in an interview due to air Monday that the only alternative to her Chequers deal is no deal.

'Substantial costs'

Commenting on the obstacles within the negotiations, the IMF said fundamental questions surrounding the U.K. and EU's future relationship needed to be answered.

"Resolving these issues is critical to avoid a 'no deal' Brexit on World Trade Organization (WTO) terms that would entail substantial costs for the U.K. economy — and to a lesser extent the EU economies — particularly if it were to occur in a disorderly fashion," the report said.

Brexit supporters argue that leaving the EU will allow the U.K. to strike out on its own and forge trading relationships with other economies around the world. Those that want to remain say the U.K. could be plunged into an economic wilderness with trade deals taking years to negotiate.

The IMF said that while new trade agreements could eventually pare some of the U.K.'s economic losses caused by Brexit, "such agreements are unlikely to bring sufficient benefits to offset the costs imposed by leaving the EU."

The U.K. is due to leave the EU on March 29, 2019. The British government and EU have reached a conditional agreement for a 21-month transition period, however, in an attempt to avoid a "cliff-edge" scenario where the U.K. abruptly leaves the bloc and enters a period of legal and economic uncertainty.

The IMF characterized the range of remaining issues to prepare for Brexit as "daunting" and underscored the importance of securing an implementation period. "The U.K. will have to bolster human, physical, and IT resources in customs and other services, and establish domestic agencies to replace EU ones," the Fund warned, as well as renegotiating "the hundreds of bilateral and multilateral international agreements to which it is now party via its EU membership."

It said the "massive scope of work" that remains and the limited time before the U.K. exits the EU "would likely leave preparations incomplete on departure day despite even the most determined efforts."