Tuesday 9 April 2019 2:00 pm

No-deal Brexit could tip UK and EU into recession, IMF says

Reporter covering economics and markets. You can send me stories or get in touch at harry.robertson@cityam.com

Reporter covering economics and markets. You can send me stories or get in touch at harry.robertson@cityam.com

A no-deal Brexit could see both Britain and the EU slide into a two-year recession in a worst-case scenario, the International Monetary Fund (IMF) has said.

Read more: IMF director says majority of countries will see growth slow in 2019

The UK economy will grow by less than previously thought even with a deal, the Washington-based organisation predicted, as it slashed its growth forecasts for all of the world’s advanced economies amid a global slowdown.

A no-deal outcome that led to severe border disruptions and a quick erection of tariffs would cause UK GDP to fall by 1.4 per cent and 0.8 per cent in the first and second years, according to the organisation. The EU’s GDP would be 0.2 per cent and 0.1 per cent lower in such a scenario.

The IMF said a no-deal outcome would have a total negative effect on UK GDP of 3.5 per cent by 2021 compared to the current projection.

The IMF’s report said the economy would suffer as trade tariffs rose and non-tariff costs involved with customs and regulations also increased, including higher costs for the UK financial sector.

UK GDP is set to expand 1.2 per cent in 2019 should it leave the EU with a deal, 0.3 percentage points less than the IMF predicted in January as Brexit uncertainty and a global slowdown weigh on the country's prospects.

In more bad news for Europe’s biggest economy, the IMF said Germany will now grow just 0.8 per cent in 2019, meaning the organisation has cut its growth prediction for the country by over half since October in two consecutive downgrades.

Last week Germany’s manufacturing sector was shown to have sharply contracted in March, while on Monday it was revealed that imports and exports were both lower than expected.

Italy will be the slowest-growing advanced economy in 2019, the IMF said, achieving feeble growth of 0.1 per cent. Meanwhile US GDP will grow 2.3 per cent in 2019, 0.2 percentage points lower than the IMF’s January report foresaw.

Gita Gopinath, director of the research department at the IMF, pointed to “the escalation of US-China trade tensions, needed credit tightening in China… disruptions to the auto sector in Germany, and financial tightening” as reasons for the global slowdown.

However, the IMF predicted there would be a pick-up in growth at the end of 2019 and into 2020, based on “an ongoing buildup of policy stimulus in China, recent improvements in global financial market sentiment [and] the waning of some temporary drags on growth in the euro area.”

The IMF said many risks to global growth would remain in place for the foreseeable future. Gopinath said: “Tensions in trade policy could flare up again and play out in other areas such as the auto industry, with large disruptions to global supply chains.”

Read more: US threatens tariffs on $11bn of EU goods

She said: “Growth in systemic economies such as the euro area and China may surprise on the downside, and the risks surrounding Brexit remain heightened.”