Graeme Wearden 

IMF warns against no-deal Brexit, as trade war fears weigh on markets – as it happened

The International Monetary Fund warns that Brexit is hurting UK growth, and things could get a lot worse...
  
  


And finally, a quiet day’s trading on Britain’s stock market has ended.

The FTSE 100 index closed just two points lower at 7,302 (or down a barely noticeable 0.03%).

Fiona Cincotta of City Index says the US-China trade dispute kept a lid on shares today.

The FTSE had a slightly choppy day, with a mid-morning recovery cut short by the US markets starting to slide as US-China tensions escalated again.

A set of different media reports is coming from the US, most of them still unconfirmed, saying that the US might tone down its initial plans to introduce a 25% tariff on $200 billion worth of Chinese goods and instead bring in tariffs of only 10%. Other news reports are more prominently carrying President Trump’s comments about how the tariffs have put the US in a good negotiating position. Amidst all of this China is saying that it will respond in kind to any US move but more worryingly is threatening to walk away from near term negotiations altogether, which would cement the tariff system for the time being.

The trade tit-for-tat is keeping the markets in Europe, Asia and the US on their toes over the possible escalation of the conflict and is deflecting focus from any other underlying regional drivers, such as the fundamentally fairly strong state of the US economy. The dollar is weaker against the pound, the euro and the yen and is just holding the line against the Canadian dollar.

And on that note, goodnight! GW

The Labour Party has now weighed in, urging chancellor Philip Hammond to hammer home the IMF’s warning to his cabinet colleagues.

John McDonnell MP, Labour’s Shadow Chancellor, says:

“Today the IMF has underlined the warnings that we’ve already heard from trade unions and business organisations about the damage that a cliff edge Brexit would do to our economy.

“Once again I call on the Chancellor to show some leadership and make it clear to his colleagues that he will not accept a no deal Brexit and the damage it risks doing to jobs, wages and living standards in this country”.

Summary

Time for a recap:

The International Monetary Fund has warned that Britain’s economy will be hit hard if the country leaves the EU without a deal.

In its latest assessment of the UK economy, IMF managing director Christine Lagarde said a no-deal Brexit would hit growth and weaken the pound.

She told a press conference in London that:

“If that happened there would be dire consequences. It would inevitably have consequences in terms of reduced growth, an increase in the [budget] deficit and a depreciation of the currency.

“In relatively short order it would mean a reduction in the size of the economy.”

The IMF warned that the UK economy will be permanently smaller after Brexit, regardless of the flavour, compared to staying in the EU and enjoying frictionless trade.

The Fund also warned that Britain faces a “daunting” list of tasks to clear before Brexit in March 2019, adding:

The massive scope of work that remains and the limited time before the UK exits the EU would likely leave preparations incomplete on departure day despite even the most determined efforts.

In a pointed nod to some of his own colleagues, chancellor Philip Hammond said the UK must heed Lagarde’s warning and ensure a close relationship with the EU for the future. Otherwise, Hammond claims, the UK could lose the progress made since the financial crsisis.

Stock markets in Asia have fallen, following reports that America could impose tariffs on an extra $200bn of Chinese imports this week. The Shanghai stock exchange has hit its lowest level since 2014, as trade war fears swept local exchanges.

Donald Trump has ratcheted up the pressure, warning that countries who don’t play fair will be “tariffed”....

In a worrying sign for Britain’s auto industry, 3,000 staff at Jaguar Land Rover’s plant at Castle Bromwich are moving to a three-day week.

My colleague Rob Davies reports:

The news came hours after the carmaker was accused of “scaremongering”about the impact of Brexit by a Conservative MP. JLR, owned by the Indian conglomerate Tata, said it had made the decision to reduce production in the light of difficult conditions in the automotive industry, amid sluggish demand.

A spokesperson said: “In light of the continuing headwinds impacting the car industry, we are making some temporary adjustments to our production schedules at Castle Bromwich.

Just in, growth in New York’s factory sector has slowed this month.

The Empire manufacturing index of business conditions has dropped to 19 this month, sharply down on August’s 25.6. Firms reported a slowdown in new orders, and a rise in costs -- perhaps a sign that the trade war is hurting.

The IMF have now uploaded Christine Lagarde’s opening statement at today’s Article Four press conference on the UK economy.

Here’s the key section, on Brexit:

For the UK, we are projecting growth of about 1½ percent this year and next , down from about 1¾ percent in 2016 and 2017. As we noted last year, Brexit-related effects are the driving factor for the slowdown in growth since the referendum. This has occurred despite strong policy frameworks and implementation. Uncertainty about the future economic environment has weighed on investment, despite still robust global growth and easy financing conditions, while the post-referendum depreciation of sterling has depressed real income growth and consumption. While exports have picked up thanks to the weaker currency, they have not done so by enough to prevent an overall slowing of growth. Despite the more modest growth, however, employment continues to reach record levels, and the unemployment rate is near historic lows.

Our projections assume a timely agreement with the EU on a broad free trade pact and a relatively smooth Brexit process after that. A more disruptive departure will have a much worse outcome. Let me be clear: compared with today’s smooth single market, all the likely Brexit scenarios will have costs for the UK economy , and to a lesser extent for the EU, as well. The larger the impediments to trade in the new relationship, the costlier it will be. This should be obvious, but it seems that sometimes it is not.

We should not understate the progress that has been achieved in the Brexit negotiations , most notably the tentative agreement on an implementation period. But many critical issues remain unresolved, most significantly a political agreement on the future economic relationship between the UK and the EU and the status of the Irish land border. We encourage both the UK and the EU to work diligently to reach agreement on these open issues to avoid a very costly cliff edge Brexit.

Video: IMF chief Lagarde today

The BBC have helpfully tweeted two video clips of Christine Lagarde speaking this morning.

Here she is, explaining how all the possible Brexit scenarios have a cost for the UK economy, and Europe too.

And here’s Lagarde on the specific negative consequences of a no-deal Brexit.

Updated

Theresa May’s official spokesman has played down the IMF’s claim that a no-deal Brexit would be very costly for Britain.

The Press Association has the details:

Chancellor Hammond said the report underlined the need for a Brexit deal to ensure the economic gains of the past decade were not lost.

“We are at a critical juncture for the UK economy. Despite the contingency actions we are taking, leaving without a deal would put at risk the substantial progress the British people have made over the last 10 years,” he said.

Downing Street stopped short of an explicit endorsement of Mr Hammond’s warning.

When asked whether the Prime Minister backed her Chancellor’s assessment, Theresa May’s official spokesman told reporters: “The PM said very clearly that she believes our best days are ahead of us and we will have plans in place to allow us to succeed in all scenarios.”

Geraint Johnes, Professor of Economics at Lancaster University Management School, has warned that the IMF’s new forecasts could be too optimistic.

“The IMF forecast of 1.5% growth for UK GDP both this year and next comes on the same day as some even more pessimistic forecasts from the British Chambers of Commerce (who are now forecasting 1.1% and 1.3% growth in 2018 and 2019 respectively). In both cases, risks posed by Brexit are to the fore.

Professor Johnes is also concerned that Brexit is distracting minister other issues (such as fixing productivity, as Lagarde pointed out this morning)

The IMF emphasises actions which the UK needs to take, specifically in the arenas of productivity and regional development, to stimulate improved growth. While, in the Industrial Strategy and the Northern Powerhouse, the government has measures in place, these have necessarily taken a back seat over the last two years, and renewed efforts are needed.”

Updated

Meanwhile in America, Donald Trump is awake...and threatening that countries who don’t trade fairly will be “tariffed”:

(Mr Morici was speaking on Fox and Friends, one of the president’s favourite shows)

MP: IMF report shows we need a people's vote

Labour MP David Lammy MP says the IMF’s gloomy forecasts prove that the UK should hold a second referendum on Brexit.

Lammy, who supports the Best for Britain campaign, says:

“The IMF report proves beyond doubt that the Tories’ plans would act as a sledgehammer to the UK economy. The substantial costs would weigh disproportionately on those with the least.

“It’s not fair on the most vulnerable in this country. The Prime Minister might try to trumpet this report as a victory for her Chequers plan, but doing so would be to deceive the British people. She and the Brexit extremists who have held a gun to the country’s head should take responsibility for this entire mess.

“No deal would be a nightmare - that’s for certain. We need a people’s vote with the option to stay in the EU.”

Here’s more snap reaction to the IMF press conference.

Reuters has focused on Christine Lagarde’s warning that a no-deal Brexit would be bad for growth:

Shehab Khan of the Independent fears the impact of Brexit on the UK people:

The BBC’s Katie Hile points out that Lagarde hasn’t given up hope that a Brexit deal will be reached:

I missed this point earlier, but the IMF may also be preparing to cut its global growth forecasts:

Q: You says Britain faces “daunting’ Brexit challenges, so would a 21-month transition period actually be long enough?

Christine Lagarde replies that any extension to the proposed transition arrangement would be welcomed by those officials charged with negotiating new deals.

And that’s the end of the press conference.

Q: Does the IMF believe there will actually be a Brexit dividend, or not?

Christine Lagarde says Britain faces a short-term cost from Brexit, and a separate long-term dividend, which arrives gradually over time.

But these two may not be the same size, she warns.

Philip Gerson, the IMF’s UK mission chief, weighs in too, warning:

The UK will be permanently smaller [after Brexit], and that means permanently lower revenues.

Q: What should policymakers do, if Britain leaves the EU without a deal?

Lagarde reiterates that a a No deal Brexit would be a severe supply shock to UK economy.

And in that case, she doesn’t think a fiscal response would address the roots of the problem. In other words, don’t expect the government to boost spending.

On the workload issue, Lagarde says Britain needs to negotiate 63 trade deals in case there is a no-deal Brexit. That’s a “heck of a lot of work”, she says dryly.

Christine Lagarde says she “hopes and prays” that there will be a deal between the UK and the EU (on her last visit, she said a no-deal Brexit was unimaginable).

Q: Would a no-deal Brexit push the UK into recession?

Christine Lagarde says the IMF’s economists are working on its forecasts for different Brexit scenarios, and will present them to its Board in November.

Lagarde: Brexit won't provide cash boost for NHS

Q: Could Britain could use a “Brexit dividend” to provide extra funding for the National Health Service (the Brexit bus pledge)?

Lagarde warns that any Brexit dividend won’t come into the UK purse instantly, it will come over a period instead.

So,

I don’t think you can actually front-load what is due to come later to address a financing that is needed now.

Q: Is the Brexit debate distracting politicians from tackling other economic problems?

Lagarde replies icily that Britain’s productivity would certainly improve if the same level of passion directed at Brexit was put into tackling the productivity crisis.

Lagarde: This is why a no-deal Brexit would be bad

Christine Lagarde is now taking questions.

She declines to answer a question about a possible second referendum

Q: Why would a no-deal Brexit be so bad?

If that was to happen, it would have severe economic consequences, Lagarde predicts.

“It would be a shock to supply, and would result in reduced growth, increased deficit, depreciation of the currency...and in reasonable short order, it would mean a reduction in the size of the UK economy.

Lagarde also warns that the UK economy will be weaker after Brexit, whatever deal is reached.

“Any deal would not be as good as the smooth process under which goods, services, people and capital move between the EU and the UK without barriers, without impediments and obstacles.

Whatever the deal is will not be as good as it is at the moment.

Updated

Christine Lagarde says that Brexit isn’t the only challenge facing the UK.

Productivity is another bugbear. By the average Thursday afternoon, the average US or German worker has produced as much as a UK worker manages by Friday afternoon, she points out.

But there are reasons for hope too. Lagarde says Britain can take comfort from its “long and glorious history” and the strength of its people. [given today’s gloomy warnings, we may need it....]

Lagarde: It's obvious that Brexit will be costly

IMF chief Christine Lagarde is now speaking.

She warns that a no-deal Breixt would impose very large costs on the UK economy.

Leaving the EU without an agreement is the most significant near-term risk to the UK economy, she continues.

Lagarde confirms that the IMF expects the UK will only grow by 1.5% this year and next year. Brexit effects are the main reason for this slowdown, she says.

Those forecasts are based on the assumption that the UK and EU reach a deal, Lagarde reminds her audience. A No-deal Brexit would have more disruptive effects on growth.

Turning to trade, Lagarde warns that all the likely Brexit scenarios will have costs for the UK economy, and to a lesser extent for the EU as well.

“This should be fairly obvious, but it seems that sometimes it isn’t,” she adds with a shrug.

Updated

Hammond: We must agree a close partnership with EU

The IMF and the Treasury are holding a press conference in London now to discuss today’s “Article IV” report.

Uk chancellor Philip Hammond speaks first, saying the UK economy is “fundamentally strong”. He points out that that unemployment is at a 43-year low.

But we have reached a critical juncture for the UK economy, Hammond continues.

He says Britain must reach a “close and enduring partnership” with its EU partners, and not put the achievements of recent years at risk.

Hammond adds that we must heed the IMF’s warning of the “significant cost” that not reaching a deal will have on British jobs and British prosperity.

Updated

Some instant reaction to the IMF’s new healthcheck on the UK economy, and its Brexit warning:

IMF: No-Deal Brexit would be very costly

The IMF also warns that a no-deal Brexit would be much worse for the UK than the negotiated exit which Theresa May is pushing for.

Today’s report says:

Brexit negotiations have yielded agreement in principle on a 21-month implementation period. If ratified, this would allow important additional time to prepare for the new relationship between the UK and EU.

However, fundamental questions—such as the future economic relationship between the two and the closely-related question of the status of the land border with Ireland—remain unanswered. Resolving these issues is critical to avoid a “no deal” Brexit on WTO terms that would entail substantial costs for the UK economy—and to a lesser extent the EU economies—particularly if it were to occur in a disorderly fashion.

While all likely Brexit outcomes will entail costs for the UK economy by departing from the frictionless single market that now prevails, an agreement that minimizes the introduction of new tariff and nontariff barriers would best protect growth and incomes in the UK and EU. Over time, new trade agreements with countries outside the EU could eventually pare some of these losses for the UK. However, such agreements are unlikely to bring sufficient benefits to offset the costs imposed by leaving the EU.

Updated

IMF: UK faces 'massive' workload ahead of Brexit Day

Newsflash: The International Monetary Fund is warning that Britain faces a “daunting” list of challenges ahead of Brexit next spring.

In its latest healthcheck on the UK economy, just released, the Fund points out that growth has “moderated” since the EU referendum of 2016. This means that the UK has underperformed major rivals.

The IMF says:

Uncertainty over the terms of the EU withdrawal has weighed on private sector activity. Above-target inflation following the sharp post-referendum sterling depreciation has slowed real income and consumption growth.

Business investment has been lower than would be expected in the context of robust global growth and favorable financing conditions. The softening of domestic demand was partially offset by a higher contribution from net exports, supported by weaker sterling and strong external demand. Overall, growth fell to about 1¾ percent in 2016-17, moving the United Kingdom from the top to near the bottom of the G7 growth tables. The employment rate, however, continues to reach record highs.

The IMF estimates that the UK will probably grow by around 1.5% this year, and in 2019 — below its long-run average.

That projection assumes “timely agreement” of a Brexit trade deal, and a smooth transition. However....

A more disruptive departure from the EU could lead to a significantly worse outcome, especially if it were to occur without an implementation period. By contrast, an agreement featuring fewer impediments to trade than currently expected could buoy business and consumer confidence, leading to faster growth.

And even if a transition deal is agreed, many challenges lie ahead.

Indeed, the ‘massive’ workload can’t be cleared by March 2019, the IMF believes, even if both sides work constructively at top speed.

As today’s Article IV Mission, puts it:

The range of remaining issues to prepare for Brexit is daunting, underscoring the importance of securing an implementation period.

The UK will have to bolster human, physical, and IT resources in customs and other services, and establish domestic agencies to replace EU ones. In addition, the government will need to renegotiate the hundreds of bilateral and multilateral international agreements to which it is now party via its EU membership. Many of the required tasks cannot be initiated until there is greater clarity on the future trade relationship with the EU or even until Brexit occurs.

The massive scope of work that remains and the limited time before the UK exits the EU would likely leave preparations incomplete on departure day despite even the most determined efforts. This risks serious disruptions without an implementation period in place. Co-ordination and co-operation between the EU and UK on priority issues, such as ensuring air traffic continues to flow, would be to the benefit of both parties. Joint technical discussions between UK and EU experts could facilitate this process.

Updated

Jameel Ahmad, global head of currency strategy and market research at FXTM, says the US-China trade dispute is worrying investors as they returned to their desks today.

There is no disputing that one of the main contributors to the uncertain external environment is mixed messages when it comes to the status of trade talks between the United States and China. Conflicting reports remained a theme over the weekend when indications circulated that on one hand President Trump has provided the green light for additional Chinese tariffs being met, with other reports that Beijing was considering rejecting the offer from Washington to resume trade talks.

This ultimately suggests to investors that we are no closer to an “exit” door when it comes to prolonged trade uncertainty. As such, it wouldn’t be a major surprise if investors remain “risk off” as trading for the week gets underway

Updated

Chinese stock markets hits four-year low

Boom! China’s stock market has closed at its lowest level since 2014, as traders brace for fresh US tariffs.

Today’s 1.1% slide takes the Shanghai Composite Index down to 2,651 points, the weakest point since late November 2014.

Every sector on the index lost ground, following those reports that president Trump could sign off $200bn of new tariffs this week.

European stock markets have opened cautiously, as trade worries weigh on investors.

Germany’s DAX has dropped by half a percent, while the FTSE 100 has dipped a toe into the red.

Rebecca O’Keeffe, Head of Investment at interactive investor, says:

European equity markets have started the week lower, following Asian markets down, as President Trump mulls new tariffs against China.

President Trump’s style is to escalate the pressure to try and generate as much leverage as he can in any potential negotiation, but China may not play his game, with reports that they are considering pulling out of any trade talks, making it difficult to see a resolution to the tensions in the short term.

The Global Times newspaper, published by the Chinese Communist Party, has vowed to launch a ‘beautiful’ counterattack if the US imposes more tariffs.

Reuters has the details:

“It is nothing new for the U.S. to try to escalate tensions so as to exploit more gains at the negotiating table,” the Global Times, which is published by the ruling Communist Party’s People’s Daily, wrote in an editorial on Monday.

“We are looking forward to a more beautiful counter-attack and will keep increasing the pain felt by the U.S.,” the Chinese-language column said.

Paul Donovan of UBS isn’t impressed by the prospect of America slapping fresh tariffs on Chinese goods:

It is all change in the flip-flop world of US trade policy. Media reports suggest US President Trump will impose yet more taxes on Americans who dare to buy things partially made in China.

There are also reports China will refuse to attend trade talks with the US. This is not official – there are no tweets – but Asian markets reacted.

Trade issues and their impact on the global economy are likely to dominate investor focus this week, says Stephen Innes of foreign exchange group OANDA.

Innes says Trump’s push for fresh tariffs on Chinese goods could undermine Treasury Secretary Mnuchin’s attempts to broker a trade deal with China.

China officials will continue to be frustrated. This good cop / bad cop routine continues to undermine Mr Mnuchin’s efforts as it’s still not clear if anyone other the Trump himself is commissioned to cut a deal.

And not too unexpectedly and quite ominously China could cancel the meeting.

But assuming the Tariff go through Tuesday, given that this is not so unexpected I guess the big question is 10 % or 25%, and I suspect this is where the event tail risk lies. If Trump comes out with 25 %, we could get an outsized market reaction.

The agenda: Trade war fears dominate

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

It’s a new week, but investors are fretting about a familiar fear - Donald Trump’s trade wars.

Over the weekend, the Wall Street Journal reported that the US president is poised to impose a fresh round of tariffs targeting about $200 billion in Chinese goods, from consumer products to machinery and chemicals.

According to the Journal, the tariffs are expected to be set at around 10%, rather than the 25% which Trump recently floated.

It reported that:

President Trump’s decision..is designed to give the US more leverage in discussions with China over allegations that Beijing coerces American firms into handing over valuable technology to Chinese peers.

Even so, such a move would escalate the trade dispute with China and doubtless provoke a retaliation.

As one senior Chinese official put it:

“China is not going to negotiate with a gun pointed to its head.”

The US first floated these tariffs in July, putting the idea out to consultation. That process ended last week, and the WSJ believes an announcement could come today or tomorrow.

This has disappointed the markets. Last week, shares rose after it emerged that Treasury secretary Steven Mnuchin was trying to organise fresh talks with Chinese officials over trade.

Those negotiations now look fragile. So Asian indices are falling back into the red. China’s Shanghai Composite has shed 1%, while Hong Kong’s Hang Seng index is down 1.2%.

Naeem Aslam of Think Markets says investors are “highly concerned” about the Trump’s upcoming decision.

The president of the United States, Donald Trump is determined to put another $200 billion of tariffs on Chinese goods. There was some hope last week that the White House may be able to resolve this matter with Beijing in a more peaceful fashion.

China has made one thing clear for Trump that threats and such behaviour aren’t going to work with the country. Under the current circumstances, there are real chances that the new set of negotiations may never begin. So far, the Chinese government has declined to resume the trade talks because Trump is telling his aid to prepare for the next round of trade tariffs. This is the prime reason that we have seen the stocks tumbled over in Asia and the same momentum is highly likely to continue over in the Europe.

Also coming up today

The International Monetary Fund is releasing its latest assessment of the UK economy. IMF chief Christine Lagarde will speak in London this morning.

New inflation figures are expected to confirm that prices in the eurozone rose by 2% in August.

Argentina’s economy minister is to present details of a new austerity budget to parliament. It’s an attempt to shore up its IMF rescue package, and resist another plunge in the value of the peso.

The agenda:

  • 10am BST: IMF press conference in London
  • 10am BST: Eurozone inflation figure for August
  • 1.30pm BST: US Empire manufacturing survey

Updated

 

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