In the run-up to the Brexit vote a little more than 100 days ago the IMF issued a series of increasingly alarming warnings about the consequences for the UK economy should the electorate decide to reject Europe.
In May the Washington-based organisation predicted a vote to leave the EU would precipitate a stock market crash and send house prices tumbling.
“We have looked at all the scenarios,” said IMF chief Christine Lagarde. “We have done our homework, and we haven’t found anything positive to say about a Brexit vote.”
The following month, with the poll less than a week away, the IMF stepped up the rhetoric, warning that the UK would be plunged into recession if it decided to leave, with GDP crumbling by as much as 5.5 per cent by 2019 as the nation became embroiled in lengthy trade negotiations.
Inflation would rise and living standards would fall, it warned. About the only thing it didn’t throw in was the imminent arrival of a plague of locusts.
Three months on and the UK is now forecast – by the IMF – to have the fastest growing economy this year among all the leading G7 industrial nations, outstripping the US, Japan, Germany, France, Italy and Canada.
The forecast, published in the World Economic Outlook released on Tuesday, came as share prices raced ahead on the London stock market, at one stage taking the FTSE 100 index just two points away from its all-time intra-day high of 7,122 points, reached in April last year.
Profit-taking
In the end profit-taking took its toll and the blue chip index closed at 7,074, short of the previous closing peak of 7,104. That’s still a rise of 1.3 per cent on the day, and its highest level in 18 months. And there was a new closing record set by the more UK-focused FTSE 250 index, which ended 0.9 per cent ahead at 18,342, having broken through the 18,550 level earlier in the day.
So the predictions of gloom from the IMF in the run-up to the referendum turn out to have been unduly alarmist and, for a global institution of its stature, unwise, to say the least. The UK will not now fall into recession, it says, despite its earlier warnings.
But anyone who thinks Britain will come through the lengthy Brexit process entirely unscathed is very much mistaken.
While the IMF has raised its forecast for the UK this year to 1.8 per cent, its prediction for next year has been cut further, to 1.1 per cent – and that assumes “smooth post-Brexit negotiations”. Before the June 23th vote it had been expecting growth of 2.2 per cent next year.
The IMF may have been overly-pessimistic in its Brexit predictions but it certainly wasn’t alone. In a near-hysterical attempt to avert a Leave vote, the then chancellor George Osborne claimed just days before the vote that a Leave decision would force him into a drastic emergency budget in which taxes would be raised and spending slashed, with steep cuts to the health service, education, defence, transport and local government.
Big benefits
Osborne is now sitting on the back benches and, in a supreme piece of irony, his family firm, the upmarket wallpaper group Osborne & Little, yesterday predicted it would see big benefits from Brexit.
The company, run by the former chancellor’s father Sir Peter Osborne, earns much of its money in dollars, with North America its largest single market. If sterling remains weak then it will enjoy a “material benefit” to its business next year, the company said.
The soaring stock market was a cause for some celebration in the City on Tuesday but the driving force behind it was not the state of the nation’s economy but the weakness of its currency.
Amid growing fears of a “hard Brexit” – in which the UK would have to give up full access to the Single European Market in order to keep control over immigration – sterling has slumped to a fresh 31-year low against the dollar and a three-year low against the euro. At one stage yesterday the pound touched $1.2721, lower than the $1.2796 reached in the immediate aftermath of the vote.
The pound’s weakness has in turn boosted the prices of some of the biggest companies on the London market, the multinational groups such as Shell, HSBC and the commodities and pharmaceutical giants, which earn a large proportion of their profits in dollars. Strip out the sterling effect, and the picture is far less rosy.
– Fiona Walsh is business editor of theguardian.com
