IMF caps week of Brexit warnings with output, house-price risks

International Monetary Fund (IMF) Managing Director Christine Lagarde speaks during a panel discussion during the Anti-Corruption Summit London 2016, in London, on May 12, 2016.
International Monetary Fund (IMF) Managing Director Christine Lagarde speaks during a panel discussion during the Anti-Corruption Summit London 2016, in London, on May 12, 2016. PHOTO: AFP

WASHINGTON (BLOOMBERG) - The International Monetary Fund capped a week of warnings by heavy-hitting supporters of Britain staying in the European Union, all unanimous in their view of the dire consequences of a so-called Brexit.

A vote to leave the bloc could lead to a "protracted period of heightened uncertainty," triggering financial-market volatility and hurting economic output, the fund said in its Article IV report on the United Kingdom published on Friday. An exit could also erode London's position as a financial center and cause "sharp" drops in house and equity prices, the IMF warned. The risk of a vote to leave in the June 23 referendum is already hitting investment and hiring decisions and economic activity, it said.

The process of a renegotiation of Britain's trading relationships "could well remain unresolved for years, weighing heavily on investment and economic sentiment during the interim and depressing output," the IMF said. "In addition, volatility in key financial markets would likely rise as markets adjust to new circumstances."

The intervention of IMF Managing Director Christine Lagarde, presenting the report in London, is the culmination of a week of warnings delivered by supporters of the "Remain" campaign, from Prime Minister David Cameronand his predecessor, Gordon Brown, through Chancellor of the Exchequer George Osborne to Bank of England governor Mark Carney, putting "Leave" campaigners on the back foot. The IMF had already warned in April that Brexit could cause severe damage to global growth.

As Mr Cameron and Mr Brown stressed the potential risk to security and peace in Europe from leaving, Carney delivered his strongest warning yet Thursday, evoking the risk of recession as the BOE's Monetary Policy Committee cut its growth forecast citing Brexit risks. A day earlier, Mr Osborne said the central bank and the Treasury were putting in place contingency plans to manage potential shocks in financial markets if Britons vote to leave.

The "Leave" campaign fought back with Boris Johnson, its most prominent supporter, embarking on a nationwide bus tour to push for Brexit.

The fund warned that investors anticipating the adverse economic effects of the U.K. quitting the bloc could also accelerate the impact of a vote to leave, potentially entailing "sharp drops in equity and house prices, increased borrowing costs for households and businesses, and even a sudden stop of investment inflows into key sectors such as commercial real estate and finance." By contrast, it said that economic growth is expected to rebound during the second half of the year in the event of Britain staying in the EU.