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- International Monetary Fund says that Brexit has “the potential to reshape the structure” of the British economy.
- Fund says that financial services are likely to be hardest hit, although manufacturing may also face significant changes.
- Possible shifts in the way the UK economy is structured could have important implications for the UK’s productivity growth, which the IMF says “will be the primary determinant of UK living standards in the long run.”
LONDON – Leaving the European Union has “the potential to reshape the structure” of the British economy as the UK’s future relationship with the EU becomes more clear, the International Monetary Fund said.
On Wednesday, the IMF published the conclusions of its recent mission to the UK – a standard visit carried out by IMF staff to monitor the state of the British economy – and said that it sees the potential for a shift in the way Britain’s economy is structured as Brexit alters the sectors that are most important to the UK’s growth.
“The impact will depend on the nature of the final agreement, and may take many years to fully materialize. However, in the coming years agriculture, manufacturing and services will all be affected by changes in the trade framework, regulatory structure and labor market,” the fund’s concluding statement said.
The fund gave particular attention to Britain’s financial services sector, which is a major contributor of both output and tax revenues, but faces an uncertain future as it prepares to lose its financial passporting rights with the EU.
The passport is effectively a set of rules and regulations that allow UK based financial firms to access customers and carry out activities across Europe. Many non-EU lenders use the passport to operate a hub in the UK and then sell services across the 28-nation bloc.
It is, however, tied inextricably to membership of the European Single Market, which Britain is set to leave during Brexit, meaning that those passporting rights will also be lost. The IMF sees this as a major concern.
“The financial sector, which represents about 7 percent of GDP but accounts for around 10 percent of tax revenues and 14 percent of exports, may be particularly affected in the absence of an agreement that allows the majority of EU-facing financial services currently provided from the UK to remain there,” the IMF said.
Earlier on Wednesday, it was reported that the Bank of England is planning to propose a set of new rules that will allow certain European lenders offering wholesale finance to keep operating as normal in the UK once Britain leaves the EU, possibly addressing one of the biggest issues for the sector after Brexit.
Other sectors that could be particularly impacted, the IMF said, include manufacturing, which relies heavily on international trade, both for selling finished products and importing parts to build those products.
“Manufacturing firms with complex and lengthy international supply chains, such as in the automobile industry, could also face significant challenges,” the fund said.
As it stands, the UK’s economy is heavily focused on the services sector, with roughly 78-80% of GDP generated by output from that sector. By contrast, manufacturing contributes around 15%. Construction adds another 5%, while agriculture is worth roughly 1% of GDP.
Possible shifts in the way the UK economy is structured, the IMF said, could have important implications for the UK’s productivity growth, which it says “will be the primary determinant of UK living standards in the long run.”
“The challenge the UK faces in this respect is sizable: even under the baseline assumption that labor productivity growth doubles to 1 percent from the ½ percent annual average since the financial crisis, potential growth will be only about 1½ percent per year in the medium run,” the IMF said.
Productivity has been a long running issue for Britain, and has effectively not grown since the financial crisis, leading Bank of England Governor Mark Carney to talk of a “lost decade” for the economy late in 2016.
Elsewhere in its concluding statement, the fund said that it expects UK growth to be around 1.5% in 2018, a similar figure to 2017.
“Inflation is expected to fall gradually but stay above target, implying further pressure on real wages and private consumption,” it said.
“Strong global growth will provide ongoing support for exports, but firms are likely to continue deferring some investment decisions until there is greater clarity on the UK’s future trading relationship with the EU.”