IMF says Brexit impact 'negative and substantial' for UK

[LONDON] The International Monetary Fund warned Friday that if Britain votes to exit the European Union next week it could deal the economy a "negative and substantial" blow.

In the worst-case scenario, the economy would sink into recession next year and overall economic output would be 5.6 per cent lower than otherwise forecast by 2019, with unemployment rising back above six per cent, according to an IMF analysis.

The Washington-based global crisis lender revealed the findings of its annual British economic checkup less than a week ahead of the June 23 vote on EU membership, adding that "contagion effects" from a "Leave" vote could hit markets worldwide.

"While there is much uncertainty about the precise economic effects of an exit from the EU, they are likely negative and substantial," the IMF concluded.

"An exit would precipitate a protracted period of heightened uncertainty that could weigh on confidence and investment and increase financial market volatility, as negotiations on new arrangements could remain unresolved for years."

In addition, it said, "Contagion effects could result in spillovers to regional and global markets, although the primary impact would be felt domestically."

While in a "limited impact" scenario the IMF said the economy would only lose 1.4 per cent from the current outlook by 2019, the report gave one of the starkest pictures yet of the impact of Brexit.

Campaigners in the "Leave" camp have criticised the IMF's negative view, accusing it of talking down the UK economy and being wrong on its previous forecasts.

But the IMF report pointed to a number of areas where Britain's economy would lose ground.

Firstly, trade would slow as the country is forced to renegotiate new trade deals and World Trade Organization membership, with likely higher tariffs on imports and exports in the meantime.

Secondly, possible gains on lower regulation outside the EU would be offset by costs from reduced access to the single market. Moreover, lower immigration would lead to a tighter labour supply, lower output and possibly lower productivity.

"The UK economy would likely be worse off economically in the long run," the IMF concludes.

Asked if there were any upside for the British economy from breaking with the EU, an IMF official, speaking on condition of anonymity, said one potentially positive scenario discussed was that the British economy gives up farming and manufacturing and specialises entirely in services such as finance.

"We don't see that as a likely scenario," the official said.

The IMF report was published one day after the Bank of England warned the referendum outcome represented the "largest immediate risk" for UK financial markets and possibly also for global markets.

The IMF warned that growth has already slowed this year "as heightened uncertainty ahead of the referendum on EU membership appears to be weighing on investment and hiring decisions."

AFP