In case the UK will vote to exit the European Union during the upcoming referendum, there will be very bad repercussions according to the International Monetary Fund’s (IMF) managing director Christine Lagarde.
During her presentation of IMF’s report on Britain’s economy on Friday, she said that she can’t see any benefits if Brexit goes ahead and that the UK might be driven to recession. The IMF within a report on the UK economy, also released on Friday, said that it has always not been right for Britain to exit the EU and hence a vote to leave the EU might have adverse effects not only on a national level but also regionally and even globally. One day earlier, the Bank of England Governor Mark Carney provided similar views.
IMF’s report said that in case of a Brexit, Britain would experience high volatility while interest rates might soar excessively, and that in turn would risk London’s reputation as a global financial centre. Although the IMF clearly and openly expressed its concerns regarding Brexit, Christine Lagarde supported the Fund’s decision to voice its opinion as one of its core duties is to oversee the global financial system. Moreover, the IMF plans to release forecasts on the economic implications that would follow in case of a leave vote given that this is a matter that concerns the global financial community.
The IMF anticipates that UK’s GDP might reach above 2% during 2017 and although this is an optimistic estimate, it is subject to future developments that clearly include the upcoming referendum of 23 June and also the underperforming housing market. According to the IMF, the housing market has been negatively affected due to the Brexit rumours as buying and selling completions were reduced by almost 50% during the first quarter of the current year.
The sterling reacted negatively to the IMF data as the GBP/USD on Friday slid by 0.6%. Although the daily sessions prior to Friday’s have been injected with excessive volatility, the currency pair remained largely stable and so the weekly performance was marginally negative by 0.4%.
A possible Brexit might also have direct implications to Eurozone’s economy. The nineteen-member group is struggling for economic recovery as the release of preliminary data on growth for the first quarter have been revised downwards. The report released by Eurostat on Friday trimmed the Q1 Gross Domestic Product (GDP) estimate from 0.6% to 0.5%. The annual GDP estimate was also revised marginally downwards from 1.6% to 1.5%.
The European Central Bank’s (ECB) efforts during the past years to establish solid growth have not yet been successful while its President Mario Draghi recently voiced his concern that there is still a risk for mild growth. The ECB has been taking steps to boost the Eurozone economy with several measures including low, and now negative, interest rates as well as the initiation of an €80 million worth of bonds purchasing programme.
The referendum date is fast approaching and it is expected that markets could continue with increased instability, and it remains to be seen which direction the sterling’s rate will take during the week.