UK will be fastest growing G7 economy this year, IMF says

The International Monetary Fund has predicted the UK will be the fastest growing of the G7 country this year, backtracking on its prediction that Brexit will lead to a financial crisis.

In the fund’s latest World Economic Outlook, the global financial watchdog forecast the UK economy to grow by 1.8% in 2016, which is higher than its July forecast of 1.7%.

It does however still believe the economy will eventually suffer from the shock of the EU referendum result, marking down its prediction for 2017 to 1.1%, from a forecast of 1.3% in July and 2.2% in April.

By way of comparison, the US economy was expected to expand by 2.2% in 2017 and that of Germany by 1.4%.

Financial markets reaction to Brexit was “generally contained”, aside from the depreciation in the pound, with shares up and investors recovering after the initial dip, according to the report.

The "sharp retrenchment" in manufacturing seen immediately after the referendum result was also followed shortly by a "rebound" in activity.

The surveys of the sector actually suggested that UK factories had their best quarter this year following the vote. Retail sales had also "held up" after the vote.

Following the Brexit vote, the Bank of England cut Bank Rate and freed up more cash for banks to lend, which helped to "maintain confidence" in the economy according to the IMF.

The report did however comment on the effect of Brexit on Britain's public finances in the long-run, predicting an imbalance in the books until at least 2022. The fund now believes the UK budget deficit will be 0.7% of gross domestic product (GDP) in 2021 or around £13.5bn at today's prices.

Chancellor Philip Hammond has recently abandoned the government's goal to eliminate the deficit by 2020.

Hammond did however hint at extra government spending for public investment in next month’s autumn statement, which the IMF supported.

“As greater clarity emerges on the macroeconomic impact of the Brexit vote, the need for further near-term discretionary fiscal policy easing and the appropriateness of the medium-term deficit target should be assessed, possibly in the context of the forthcoming November fiscal review,” said the report.

The growth forecasts were also based on the assumption that the UK would reach a future trade deal with the EU that avoided "a large increase in economic barriers" and "limited" political fallout, which suggests that forecasts could be dropped in the future if the UK leans towards a "hard Brexit".

The IMF's chief economist Maurice Obstfeld is also pessimistic about investment throughout Europe saying it would “dampen” after the vote. He said this was because the vote reflected "resentment of cross-border migration that has fuelled nationalist sentiment in Europe and called into question the way forward for EU integration".