Friday 13 May 2016 10:00 am

IMF head Christine Lagarde backs up Mark Carney in battle over a Brexit recession

Brexit could push the UK into recession, hit wages, lead to higher prices and shatter London's status as the financial capital of the world, Christine Lagarde, head of International Monetary Fund (IMF) has said today, in the second high-profile Brexit warning in as many days.

With less than six weeks to go until the EU referendum, – described as "a momentus decision" by the IMF – the body said that "a technical recession is one of the probabilities of the downside risks.

"A vote for exit would precipitate a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output. The long-run effects on UK output and incomes would also likely be negative and substantial.

"Uncertainty over the outcome of the referendum on EU membership, and about the implications of a potential Leave vote, already appears to be having an impact on investment and hiring decisions, with recent surveys of economic activity falling to their weakest levels in three years.

"This could entail sharp drops in equity and house prices, increased borrowing costs for households and businesses, and even a sudden stop of investment inflows into key sectors such as commercial real estate and finance."

Turning to the UK's gaping current account deficit, Christine Lagarde said: "Should a sharp drop in external financing follow an exit, this would imply a significant depreciation of sterling, and large contractions of investment and consumption, implying lower output, lower growth and higher domestic prices."

The warnings come just one day after the Bank of England was embroiled in an explosive row with former Chancellor, Lord Lamont and Conservative MPs over Mark Carney's warning that Brexit could trigger a recession.

Christine Lagarde was speaking as the IMF concluded its "mission" to the UK – a snapshot of the economy's progress and suggestions for how to shore up growth. The document was dominated by the IMF's assessment of the risks of a vote to leave the European Union.

The comments provoked outrage from Leave campaigners who believe that George Osborne is lining up allies to interfere in the debate and make the case for staying inside the EU.

Vote Leave accused the IMF of talking Britain down again, and Arron Banks of the Leave.EU group said the IMF's "track record is laughable. Its forecasts are never right, it backed the euro and it didn't see the financial crisis coming."

IMF has talked down the UK’s economy before and has been wrong in past forecasts about the UK and other countries. #VoteLeave

— Vote Leave Media (@Vote_LeaveMedia) May 13, 2016

Following the chancellor's warning that Brexit could cost thousands of jobs in Canada, Lagarde signified that the Square Mile would come under sustained pressure in the event of Brexit:

"London’s status as a global financial centre could also be eroded, as UK-based firms may lose their 'passporting' rights to provide financial services to the rest of the EU and much euro-denominated business may over time move to the continent."

If the UK votes to Remain in the EU, the IMF said growth in the UK economy – which has slowed considerably in the first four months of the year – would "rebound".

Lagarde also warned that striking a post-Brexit trade deal with the rest of the EU was "subject to considerable political risks."

Osborne welcomed Lagarde's assessment and defended her right to intervene: "These are the facts that the British people need to hear," he said.