IMF Revises Up U.K. Growth Estimates as Brexit Impact Postponed

  • IMF raises U.K. forecast to 2% expansion this year, 1.5% next
  • Prime Minister Theresa May calls for June 8 election

The U.K. economy will grow faster this year than previously forecast, according to the International Monetary Fund, though it said the Brexit fallout may only be postponed, not avoided. 

Economic growth will accelerate to 2 percent before slowing to 1.5 percent in 2018, the Washington-based organization said in a report on Tuesday, hours after Prime Minister Theresa May shocked the U.K. by calling a general election for June 8. The fund’s 0.9 percent upward revision from its October estimate was the biggest among all the countries it analyzes.

There will be a “more gradual materialization than previously anticipated of the negative effects of the United Kingdom’s decision to leave the European Union,” the IMF said in its world economic outlook. “These effects include reduced consumer purchasing power following the pound’s depreciation and its gradual pass-through to prices and the impact of uncertainty on private investment.”

The economy has performed much better than expected since the Brexit vote, with uncertainty having less of an impact on investment than anticipated and the pound’s fall helping exports. The early election could help May consolidate her Conservative Party’s efforts to deliver a clean break with the EU.

The IMF was one of many institutions criticized for being overly pessimistic about the consequences of a vote to leave the EU in the run-up to the June referendum. The Bank of England has also revised up economic forecasts since the vote.

May began two years of exit negotiations with the bloc at the end of last month. They are off to a rocky start, with British and EU leaders disagreeing over whether exit terms should be secured before a trade deal is discussed. If talks fail, the economy faces the possibility of a sudden move to World Trade Organization rules. Whatever the outcome, most economists agree there will be some sort of damage due to less migration, lower investment and potential tariffs, which will hit productivity and output.

“Growing salience of a future increase in trade costs will likely gradually dampen expectations of future real earnings and weigh on investment and hiring,” the IMF said. “Such headwinds could be magnified if the negotiations on new trade agreements are drawn out.”

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