The International Monetary Fund (IMF) came out with a warning for the UK last week. The IMF warned that Britain could expect significant costs to its economy if it leaves the European Union without agreeing to a transitional agreement.
The comments come as the UK approaches the deadline of leaving the EU on March 29, 2019. While both parties are engaged in negotiations, they are yet to strike a deal on the terms of exit from the block.
The British Prime Minister, Theresa May continues to struggle to bridge the divide within her party ranks on how to close a deal with the EU and the relationship after that. A unifying negotiating platform was only agreed upon with the cabinet in July.
Lack of progress on the Brexit deal has given rise to concerns that the UK could be heading for a no-deal Brexit. This could prompt the UK to revert to the trade rules put forth by the World Trade Organization and could also mean having to pay tariffs on goods imported from the European Union.
The EU is one of the closest trading partners for Britain.
The IMF chief, Christine Lagarde, speaking to reporters last week in London said that Britain’s economy could weaken no matter the outcome. This comes on the fact that the nation voted to leave the EU.
“It will be a shock to supply,” the IMF chief said during the presentation of the IMF’s annual report on the economic outlook for the UK.
Lagarde further added that in the short term, a no deal Brexit could reduce the size of the UK’s economy.
“It would inevitably have a series of consequences in terms of reduced growth going forward; increased deficit, most likely … and depreciation of the currency,” the IMF chief told reporters.
According to the IMF, Britain’s economy is expected to grow at a pace of 1.5% on an annualized basis in 2018 and 2019. At this rate, Britain is likely to lag behind Germany and France even if a Brexit deal was struck.
Britain’s finance minister, Philip Hammond said that the UK had made economic progress under PM May’s guidance. However, he said that the economy now stands at a critical juncture. Both the UK and the EU are in the final stages of the Brexit negotiations.
There hasn’t been any significant development so far.
“We must not put these achievements – and the prosperity of the British people – at risk,” Hammond said, as he urged his government to heed the clear warnings of the IMF.
With still six months to go, the British Prime Minister proposed to keep the UK aligned to the EU’s rules in return for the free trade of goods and an open border with Ireland which is an EU member state.
However, the EU officials are not happy, warning that the UK cannot “cherry pick” the aspects of membership without accepting the costs and responsibilities.
Over the past few weeks, the markets have been reacting to the developments from the Brexit negotiating table. Comments have been both positive and negative which has sent the pound sterling to respond to the news.
The positive comments on the progress of Brexit briefly sent the GBP higher, only for the currency giving back the gains. Lack of follow through on the headlines and no apparent progress is expected to keep the volatility to continue.
The Bank of England’s Governor, Mark Carney also weighed in on the Brexit progress. He had recently extended his term as the head of the UK’s central bank and is expected to steer the nation through the March 2019 deadline.