Both UK and eurozone would suffer from no-deal Brexit, says IMF

The International Monetary Fund has warned that both sides in the Brexit negotiations would suffer if the UK left the EU without a deal.

IMF official Jörg Decressin told Reuters that hard border controls and reversion to World Trade Organisation tariffs would cause damage on both sides of the channel.

“Under such circumstances, our concern is that economic growth will suffer, especially in the UK, but also the euro area.

“We are then possibly looking at appreciably lower growth than we presently project.”

With the EU withdrawal bill likely to be tabled in the Commons tomorrow and clashes between the major parties expected over a series of amendments, the IMF’s warning comes at a delicate time for No10.

Theresa May and Philip Hammond are known to want to secure a transition deal with Brussels that would allow time to negotiate a comprehensive trade deal.

But they are under pressure from backbench MPs and some members of the cabinet to limit a transition deal to two years, which may not be long enough to conclude trade talks. A leaked letter from foreign secretary Boris Johnson and environment secretary Michael Gove complained of “insufficient energy” on Brexit in some parts of the government, seen as a veiled attack on Hammond.

Decressin was speaking after the IMF released its latest health check on the European economy.

The Washington-based lender believes the recovery across the continent looks increasingly assured, with Europe’s 28 members expected to grow by an average of 2.4% this year before slowing to 2.1% in 2018.

Most of Europe’s major economies will lag the average, led by the UK, which will grow by 1.7% this year and 1.5% next year, the IMF said.

France’s GDP is forecast at 1.6% this year, rising to 1.8% next year as Emmanuel Macron’s labour market reforms begin to take effect. Germany’s growth rate will moderate from 2% to 1.8% in 2018.

“This recovery looks increasingly durable,” said Decressin, the deputy director of the IMF’s European department.

“Growth in the euro area has been positive for 18 quarters, lately around 2.5%. Many countries in eastern Europe have seen growth around or above 3% for some time already. So this recovery has not only become broader but also stronger.”

Decressin said the IMF supported the slow withdrawal of central bank support seen in recent weeks. He argued that the Bank of England’s move to raise its base rate for the first time since the financial crisis to 0.5% was justified by inflation hitting 3%.

A warning from the European Central Bank that it planned to reduce the level of funds injected into the eurozone economy each month was also sensible, he said, now that a return to growth was assured.

The main uncertainty remains Brexit and what kind of trade relationship the UK can set up when it leaves the EU with the 27 remaining countries, he added.

Connor Campbell, an analyst at the spread betting firm SpreadEx, said Brexit uncertainty was likely to continue for at least several weeks.

“There’s a lot for May to fret about at the moment. She could be facing defeat on part of her Brexit bill later in the week, with Tory remainers likely to team up with Labour to try and secure parliament a meaningful vote on any deal with the EU, something the PM is keen to avoid,” he said.

“There’s also threats from Michel Barnier – who stated at the weekend the EU was preparing for a no deal scenario – that if Britain doesn’t spell out how far it intends to ‘honour its obligations’ within the next two weeks then any trade talks will have to be ‘put back’.

“Finally, there’s the leaked ‘Orwellian’ letter from Michael Gove and Boris Johnson – back to scheming after last year’s Tory leadership falling-out – to May, with the prominent leaver MPs outlining a series of secret Brexit demands.”

Mihir Kapadia, the chief executive of Sun Global Investment, said the fear of a hard Brexit “continues to be a worry for markets”.

But he said it was clear the IMF wanted both sides to recognise the potential harm to GDP growth and jobs there would be from a failure to agree a deal.

“The IMF has joined a host of other thinktanks in warning of the catastrophe ahead should the UK end up with a hard Brexit,” he said.

“The IMF has emphasised the immediate negative impact not just for the UK, but also for the EU’s economy as a result of such a deal.”

“The IMF statement stresses the need for both the parties to achieve a viable Brexit, something Germany’s Angela Merkel has also emphasised.”

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