Christine Lagarde is in London to deliver the International Monetary Fund’s (IMF) latest assessment of the UK economy.
The IMF’s view is there are plenty of issues which need addressing - feeble productivity growth, a large national debt and a wide current account deficit - but the most pressing threat to our prosperity is the risk that withdrawal negotiations with the European Union unravel and we leave abruptly, next March, without agreement and without transition.
In the IMF’s view, “disorderly Brexit,” as Christine Lagarde calls it, would cause our economy to shrink. The IMF won’t say if it believes the UK would experience a technical recession (defined as two consecutive quarters of negative growth) as it is still "finalising the numbers" but it suggests that not even the most rigorous contingency planning could now prevent the economy from contracting.
As the IMF puts it, the “massive scope of work” and “limited time” left would “likely leave preparations incomplete on departure day”.
The IMF has attempted to anticipate every possible Brexit outcome. In its opinion, each leaves the UK poorer than it would otherwise be if it remained in the EU.
Growth in the EU's 27 other economies would also be damaged, although to a “lesser extent” than in the UK.
Generally speaking, the more distant our future trading relationship with the EU, the greater the IMF sees the negative impact on growth. “This should be fairly obvious,” insists Lagarde, “but it seems that sometimes it’s not”.
For the purposes of its forecast, the IMF has assumed that Brexit will be a “relatively smooth” transition to an agreement on “a broad trade pact covering goods and some services”.
The good news, for the Prime Minister is the IMF is working on the basis that a final deal between the UK and the EU could plausibly look very similar to the Chequers proposal that the government is shooting for. The bad news is the IMF believes such a deal will fail to economic transform performance. The IMF predicts growth of 1.5% this year and next that modest. And lower than the IMF forecasts for the US, Germany, France and Canada, although slightly ahead of Italy and Japan.
The IMF’s clear opinion is that the UK economy, post-Brexit, will be “permanently smaller” and, as a result, tax revenues, “permanently lower”.
The chancellor, Philip Hammond, is expected to deliver a Budget before the end of the year in which he will spell out how he will fund an extra £20 billion a year for the NHS.
In June the Prime Minister suggested the extra money would be part-funded by a Brexit dividend, as the UK stops paying into the EU Budget.
But the IMF doesn’t think a Brexit windfall will arrive in time to fund the NHS, if one arrives at all.
The IMF recommends the chancellor consider alternative ways of raising money, including tax rises. The IMF suggest abolishing the “triple-lock” - which has protected the incomes of pensioners since 2010 - could generate “important savings”.
The IMF also hints the Bank of England was premature in raising interest rates in August. The IMF doesn’t appear convinced that the UK has an inflation problem and recommends waiting for “clear confirmation of a durable rise in domestic cost pressures” before hiking Bank Rate again.
Christine Lagarde describes the task ahead as “daunting” but insists she is a “desperate optimistic”. However, when invited to say something, anything positive about Brexit, she either couldn’t or wouldn’t. The “implications of Brexit are largely negative,” she replied.