The managing director of the International Monetary Fund has said she wants Britain to stay in the EU, warning that a looming Brexit referendum posed a risk to the UK economy.
In an upbeat assessment, Christine Lagarde said the UK was enjoying strong growth, record employment and had largely recovered from the global financial crisis.
Presenting the IMF’s annual healthcheck of the economy alongside George Osborne, Lagarde said there were risks to the outlook, including from the housing market, but she was generally positive. “The UK authorities have managed to repair the damage of the crisis in a way few other countries have been able to do,” she said.
Lagarde said the IMF would work through various scenarios for the EU referendum outcome in its next assessment of the UK in May 2016. “On a personal basis … I am very, very much hopeful that the UK stays within the EU,” she added.
Separately, ratings agency Standard & Poor’s reiterated a warning on Friday that leaving the EU could cost the UK its top credit score.
The chancellor said the IMF’s latest assessment of the UK “could hardly be more positive”. He added that in the past the IMF had been critical of the government’s strategy, such as when it called for higher spending on public investment.
“Over the years I’ve been attending this article IV press conference, it has sometimes been controversial, as people pointed to the differences between our plan and the IMF’s advice,” Osborne said. “Today the IMF could not be clearer. They say that our economy is stronger, more resilient and has more jobs. The IMF believe our approach to fixing the public finances is appropriate and transparent.
“This is the strongest IMF assessment of the UK economy in the five years I have been doing this job. I take this as an endorsement of our plan to fix the roof while the sun is shining.”
— George Osborne (@George_Osborne) December 11, 2015
The IMF, which is based in Washington, also used its assessment to recommend that interest rates remain at their record low of 0.5% until there were clearer signs of inflationary pressures. Its report on the UK was delayed for six months due to the general election.
The UK’s recent economic performance had been strong and “considerable progress” had been made in tackling underlying problems, the IMF said.
While forecasting that annual growth would continue to average just over 2% for the next few years, the IMF said there were a number of risks to its “broadly positive outlook”.
“House price growth has eased somewhat over the past year, but remains high,” the IMF said. It added that government reforms had made mortgage lenders more resilient, but expressed concern about the ratio of household debt to income, which had left some households “vulnerable to income and interest rate shocks”.
Noting that the Bank of England might need to take further action to cool the housing market, the IMF said small-scale buy-to-let landlords could be “relatively exposed” if expected returns did not materialise.
Tougher limits on home-loan-to-income ratios or loan-to-value caps might be needed from the Bank, it said. “The authorities should extend the Bank’s financial policy committee’s powers of direction to the buy-to-let market to mirror those they currently have over the owner-occupied market. In addition, the authorities should continue to monitor the parameters of the help-to-buy programme and consider if they need to be adjusted.”
The IMF also highlighted Britain’s poor productivity record and the size of the twin budget and current account deficits. “The current account deficit is similarly not a result of funding a household credit boom, but nonetheless is strikingly large. Notwithstanding a flexible exchange rate and independent monetary policy, confidence shocks could reduce external capital flows into the UK, which could adversely affect growth,” it said.
Osborne said the government was trying to address the challenges identified by the IMF. “Yes, there are still risks. The IMF have identified the risks, and they are the same risks we’ve identified and are taking action to prevent,” he added.
The Fund’s worries about referendum uncertainty weighing on the UK economy coincided with a fresh warning on Brexit from S&P.
The only big ratings agency to still give Britain the top ranking said David Cameron’s decision to hold a referendum on EU membership before the end of 2017 represented a risk to the UK’s financial services sector, its exports, and the wider economy.
S&P cut its outlook for UK government debt to “negative” from “stable” in June and reiterated that stance last night. The outlook means it sees at least a one-in-three chance that the UK will lose its AAA rating over the next two years.
Explaining the stance in an update to financial markets, S&P said: “A ‘leave’ vote is likely to hurt confidence, investment, and GDP growth, with likely negative effects on public finances. As a consequence, a UK departure from the EU would likely lead us to lower the rating.”