IMF sees Brexit damage to British growth

Shoppers walk past stores on New Bond Street in London, Britain July 9, 2016. [Photo/Agencies]

The International Monetary Fund on Tuesday cut its 2017 growth forecast for Britain, blaming the Brexit and warning the damage may be greater if rocky negotiations lead to trade barriers.

The IMF said it now expects Britain's gross domestic product to expand by 1.1 percent in 2017, a downgrade of 0.2 percentage points from the previous prediction given in July.

That marks a significant slowdown compared with its estimate for 2016, the IMF said in the latest edition of its World Economic Outlook.

The British economy is now expected to grow by 1.8 percent this year, up 0.1 percentage points from prior forecasts.

"In the United Kingdom, slower growth is expected since the referendum as uncertainty in the aftermath of the Brexit vote weighs on firms' investment and hiring decisions, and consumers' purchases of durable goods and housing," the IMF said.

It added its assumptions are based on "smooth post-Brexit negotiations and a limited increase in economic barriers".

However, that may not turn out to be the case.

The British pound crashed to 31-year dollar lows on Tuesday, following weekend comments by Prime Minister Theresa May indicating a willingness to leave the single market in order to secure control over immigration from the European Union.

The single market gives Britain tariff-free access to the EU.

Meanwhile, finance minister Philip Hammond warned on Monday of "turbulence" in the British economy during the negotiations.

May also said over the weekend that Britain will start the two-year process to leave the EU by the end of March.

Britons voted in a June 23 referendum in favor of leaving the EU, sending shock-waves reverberating across financial markets.

"The unexpected vote for Brexit on June 23 leaves unclear the future shape of the United Kingdom's trade and financial relations with the remaining 27 European Union members, introducing political and economic uncertainties that threaten to dampen investment and hiring throughout Europe," the IMF warned.

The IMF also signaled on Tuesday that the British government－which is due to unveil its budget update on Nov 23－may need to reassess its deficit-slashing measures in a bid to bolster growth.

"As greater clarity emerges on the macroeconomic impact of the Brexit vote, the need for further near-term discretionary fiscal-policy easing and the appropriateness of the medium-term deficit target should be assessed, possibly in the context of the upcoming November fiscal review," it said.

The IMF acknowledged that the Bank of England's wide-ranging stimulus program had buoyed sentiment.

In August, the BoE slashed interest rates by a quarter-point to a record-low 0.25 percent and expanded its main quantitative-easing bond-buying scheme from less than a billion to 35 billion.