Saturday 18 June 2016 12:01 am

EU referendum: IMF says an acrimonious Brexit would spark recession and permanently knock UK economy

By: Jake Cordell

The economy could be plunged into recession, unemployment would jump and wages tumble if the UK votes to leave the European Union, the International Monetary Fund (IMF) has warned today.

In its latest assessment of the dangers of walking away from the EU, the IMF said the consequences would be “negative and substantial” while household incomes would end up “permanently lower”.

The IMF said: “A vote to leave the EU would result in a protracted period of heightened uncertainty, leading to a hit to output.

“The long-run effects on UK output and incomes would also likely be negative and substantial.”

The Fund calculated that the UK economy could be 4.5 per cent smaller within five years if it leaves the EU and fails to wrap up an exit deal in good time.

In a better-case scenario, where the period of uncertainty following the referendum is limited and the UK secures access to the single market, the economy would be 1.5 per cent smaller in 2021 than if it had stayed in.

In the so-called “adverse scenario” unemployment jumps from five to 6.5 per cent next year, inflation shoots up to four per cent as sterling plunges by 15 per cent after the vote. The economy would also shrink by 0.8 per cent in 2017, compared to current forecasts of 2.2 per cent growth if the UK stays in, or 1.4 per cent growth if it secures decent terms of exit.

2017 forecasts

• In the "limited scenario", the UK moves towards an "EEA-type regime. Households and firms are relatively confident about the new long run, and therefore uncertainty dissipates relatively quickly … The uncertainty is about one-quarter of that experienced during the global financial crisis."

• In the "adverse scenario … negotiations with the EU do not proceed smoothly and the UK eventually defaults to World Trade Organisation (WTO) rules …. The difficulty of the negotiations generates considerable uncertainty … at the same level of that experienced during the global financial crisis."

In the most turbulent forecast put forward, annual growth does rebound to a higher rate than it otherwise will have been, though as the IMF makes clear this is only a partial recovery of lost ground.

Leave campaigners have previously criticised the IMF, arguing that its head, Christine Lagarde, owes George Osborne favours after he helped secure her appointment for a second term as managing director. They have also attacked the group for talking down the UK and pointed out the IMF’s previous forecasting errors when it warned austerity could hold the economy back.

The IMF added it was sceptical about how easily a new arrangement could be wrapped up after a vote to leave, implying it believes the economic hit is more likely to be large than small: “The eventual outcome could well remain unresolved for years, weighing heavily on investment and economic sentiment during the interim and depressing output.”

Furthermore, if a vote to leave is coupled with restrictions on migration, as Leave campaigners have advocated, “the direct effects … would be magnified”.

Regardless of how bad the economy is hit after the vote, household finances would bear the brunt of any slowdown, the IMF forecast, falling by at least as much as economic output, probably more.

The warning comes on the same day Mark Carney was attacked by Leave campaigners who questioned the Bank of England’s independence, as the Bank itself said Brexit could be the biggest threat to the global economy.