The UK must step up efforts to improve the economy’s productivity and its international competitiveness if it is to weather the shock of Brexit, says the International Monetary Fund.
In its latest country report, the Washington-based IMF noted that Britain’s economy had faced challenges since the June 2016 referendum on European Union membership, which included a sharp drop in the value of sterling, higher inflation and depressed private consumption.
“Business investment growth has been constrained by continued uncertainty about the future trade regime,” the report notes. “UK growth moderated in 2017 despite significant monetary policy accommodation and strong trading partner growth, and is expected to remain subdued in the near term.”
Over the medium term, the IMF believes that the UK’s growth prospects “will depend on the extent of recovery of labour productivity, which has been very low since the financial crisis”. It predicts that the British economy will group by 1.6% in 2018, and that growth for last year will come in at 1.8%.
The report suggests that in response to Brexit, an agreement that minimises barriers to the cross-border flow of services, goods, and workers would best support UK growth over the coming years.
Early agreement on a transition period would avoid a cliff edge exit in March 2019 and reduce the uncertainty now facing firms and households,” it adds. “Continued steady fiscal consolidation, with an emphasis on pro-growth spending and tax reforms, remains critical to rebuild fiscal buffers and maintain investor confidence.”
The report recommends that the Bank of England should continue to withdraw monetary “at a gradual pace” and policymakers respond flexibly to data developments.
Among other recommendations, the report suggests that measures to improve productivity should include building more homes and easing planning restrictions where necessary; improving the quality of infrastructure; reforming the education system; and investing more in research.