In the event of a vote to remain in the EU, growth is expected to rebound during the second half of the year. As anticipated, the slower first half, and some lingering referendum-related effects, mean that growth is likely to fall below 2 percent for the full-year 2016, before returning to an average of around 2¼ percent over the medium term, roughly in line with potential ...IMF

 May 13, 2016

United Kingdom—2016 Article IV Consultation Concluding Statement of the Mission

                          

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Outlook and risks

1. This year’s Article IV mission has taken place as the British people prepare to make a momentous decision. Uncertainty over the outcome of the referendum on EU membership, and about the implications of a potential Leave vote, already appears to be having an impact on investment and hiring decisions, with recent surveys of economic activity falling to their weakest levels in three years.

2. In the event of a vote to remain in the EU, growth is expected to rebound during the second half of the year. As anticipated, the slower first half, and some lingering referendum-related effects, mean that growth is likely to fall below 2 percent for the full-year 2016, before returning to an average of around 2¼ percent over the medium term, roughly in line with potential. Inflation, which is currently only ½ percent, is expected to revert to target gradually, as effects from commodity price falls dissipate and low unemployment helps push up wages.

3. This broadly positive baseline forecast is subject to notable risks. As elaborated on during our previous consultation, key vulnerabilities include a low household saving rate; still-high levels of household debt and fiscal deficits, despite substantial reductions in both since the crisis; a wide current account deficit; and risks that productivity growth may remain low for an extended period. In some cases, these longstanding risks have risen since our previous consultation, with the current account deficit widening further in late 2015 and productivity growth slowing.

4. However, the largest risks and uncertainties relate to the upcoming EU referendum. A vote to leave the EU would create uncertainty about the nature of the UK’s long-term economic relationship with the EU and the rest of the world. It would also have the potential to crystallize some of the baseline risks noted above. Given the importance of the referendum, we elaborate below on its potential macroeconomic implications, while recognizing that the choice of whether to remain in the EU is for UK voters to make and that their decisions will reflect both economic and noneconomic factors.

Possible economic effects of an exit from the EU

5. A vote for exit would precipitate a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output. Following a decision to exit, the UK would need to negotiate the terms of its withdrawal and a new relationship with the EU—unless it abandoned single market access and relied on WTO rules, which would significantly raise trade barriers. It seems likely that ratification of a new deal would require unanimous consent of all EU member governments, making agreements subject to considerable political risks. As EU-level agreements also cover the UK’s trading relationship with 60 non-EU economies (and prospective arrangements with another 67 countries are in the works), the UK would also need to simultaneously renegotiate these arrangements, or else see them revert to WTO rules. These processes and their eventual outcomes could well remain unresolved for years, weighing heavily on investment and economic sentiment during the interim and depressing output. In addition, volatility in key financial markets would likely rise as markets adjust to new circumstances.

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