IMF: Brexit has thrown a "spanner in the works" of the global economy

The UK's growth forecast has been downgraded...

IMF: Brexit has thrown a "spanner in the works" of the global economy

Niall Carson / PA

The International Monetary Fund (IMF) has slashed its growth forecast for the UK for next year by 0.9% after the vote to leave the EU threw a "spanner in the works" of the global economy.

It warned that the outlook could darken even further, plunging the UK into recession, if the exit process turns out to be more painful than expected.

The central forecast sees UK gross domestic product (GDP) growing by 1.3% next year, down from a previous prediction of 2.2%, while this year's GDP figure is pencilled in at 1.7%, down 0.2% compared to the outlook in April.

Global growth, which is already sluggish, will also be lower as a result of the surprise outcome of the referendum - marked down by 0.1% this year and next according to the IMF.

The World Economic Outlook Update said: "The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies."

IMF chief economist Maury Obstfeld said: "Brexit has thrown a spanner in the works."

The forecast is the first from a heavyweight global body to assess the global impact of the Brexit vote - which has already prompted market turmoil including a plunge in the pound to 1985 levels against the US dollar and a slump in banking shares.

It echoes the IMF's pre-referendum warning about what a Leave vote might mean.

The new report said its forecast was based on the "benign assumption" of a gradual reduction in uncertainty, with the EU and UK avoiding a large increase in economic barriers, no major financial market disruption and limited political fall-out.

But it noted that "more negative incomes are a distinct possibility".

These included a worst-case severe scenario under which trade talks between the EU and UK fail, leaving a chunk of Britain's financial services industry to relocate to the euro area.

"This would reduce consumption and investment more markedly… and lead to a recession in the United Kingdom."

The report called on British and European officials to ensure a "smooth and predictable transition to a new set of post-Brexit trading and financial relationships that as much as possible preserve gains from trade between the UK and the EU".

It comes as the Bank of England is expected to cut interest rates next month to try to cushion the economy from an expected Brexit blow.