The UK has been urged to help ease uncertainty over its future relationship with its biggest trading partner, if it is to limit economic damage.
The head of the International Monetary Fund (IMF) Christine Lagarde said it was clear the UK was currently “losing out” as a result of the Brexit vote.
The organisation’s annual update on the health of the UK economy showed that while jitters over the looming divorce from the EU had delivered a marked slowdown in growth this year, there was clear evidence of a boost to exports.
:: LIVE: Brexit transition ‘must end before 2021
But it said that was largely down to stronger economic growth worldwide – aided by the weaker pound making UK goods more competitive.
The report highlighted the negative currency effects on the domestic economy in the form of higher consumer price inflation, saying it had squeezed household budgets and spending.
It said: “Despite a strong recovery in global growth and supportive macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand.
“The employment rate has remained around record highs, but the sharp depreciation of sterling following the referendum pushed up consumer price inflation, squeezing household real income and consumption.
“Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilisation, owing to heightened uncertainty about economic prospects.”
:: UK ‘best for business’ in 2018 – Forbes
At a Treasury news conference, Lagarde confirmed the IMF had downgraded its forecast for UK growth this year to 1.6% from 1.7% – and said it expected output to remain broadly stable in 2018.
It said the economic outlook would depend on the political agreements made in future with Brussels and – crucially – the timing.
It warned that the financial services and manufacturing sectors faced significant challenges in particular – with the Treasury at risk of losing tax revenue fast if a “meaningful share” of financial business was moved from UK shores to within the EU.
The IMF also declared that it did not see much more room for Government spending cuts to help the “critical” need for the UK to protect itself against possible future shocks by reducing its budget deficit further.
It pointed to a potential solution in the form of tax rises.
More from Business
The Chancellor responded to the report by saying it underlined the need to avoid a “cliff edge” Brexit.
Philip Hammond told reporters, “One of the biggest boosts we can provide to the economy – the economy of the UK and the economy of the EU27- is making early progress on delivering certainty and clarity about our future relationship with a time-limited implementation period agreed at the earliest opportunity.”