Uncertainty about the outcome of Britain’s referendum on leaving the European Union could hurt its economy, the International Monetary Fund said on Friday, though it also praised the way the country has bounced back from the global financial crisis.
In a contrast to tension in recent years between Fund staff and finance minister George Osborne over his austerity push, IMF chief Christine Lagarde was effusive as she stood alongside him at the launch of an IMF report on Britain’s economy.
“We are saluting a very strong performance by the UK economy which is due clearly to the commitments to consistent policies which have managed to restore confidence in the British economy,” she told reporters.
Osborne said the praise from the IMF would help his plan to turn Britain’s still large budget deficit into a surplus by 2020, something many economists say is not necessary.
“This is the strongest IMF assessment of the British economy in the five years that I have been in this job,” he said.
Britain grew faster than any other rich nation last year and is close to the top of the pack again in 2015, helping Osborne and Prime Minister David Cameron lead their Conservatives to a decisive election win in May.
But Cameron’s promise to hold a referendum on membership of the EU has raised questions about Britain’s relationship with its main trading and investment partners in Europe. It could also lead to the break-up of the United Kingdom if Scotland then pushes to leave the UK in order to stay in the EU.
The IMF listed the EU vote among the vulnerabilities for Britain which also included a “strikingly large” current account deficit and high levels of household debt and house prices which could be a problem when interest rates finally start to rise.
Lagarde said it was unclear what relationship Britain would have with Europe if it were outside the EU. The Fund will assess the issue in its 2016 report on Britain, which is due next May.
“How quickly will there be trade agreements? How promptly will the partners want to reestablish or reset the framework within which its financial and trade relationships are put in place?” she said in response to questions from reporters.
“We will spend a lot of our collective brain power so that for the next Article IV (report) we can have a solid assessment. Because by then we will know better what the alternatives are in that new framework, if there was such a thing,” she said.
Lagarde, a former French finance minister, said she personally hoped Britain would stay in the EU but stressed she was not speaking for the Fund.
Opinion polls show Britons fairly evenly divided on whether to remain in the 28-member bloc.
The IMF report, while backing Osborne’s plans to run a budget surplus by 2019/20, urged him to give the economy more help if growth slows.
The Fund also raised the possibility that Osborne’s plan to make deep spending cuts might prove unachievable and he should consider raising taxes if so.
The Fund predicted steady growth would continue over the next few years and that inflation should gradually return to the Bank of England’s 2 percent target.
For now, the BoE should keep rates at their record low of 0.5 percent until inflationary pressures become clearer, the report said. The risk of inflation overshooting the BoE’s 2 percent target was less worrying than an undershoot, it added.
Regulators led by the BoE should continue to be “prudent and intrusive” when it comes to overseeing the banking industry and the BoE should be given new powers to regulate small landlords who account for a third of gross mortgage lending.