The International Monetary Fund (IMF) has slashed its forecasts for UK growth following the vote to leave the European Union, yet the British economy is still expected to grow faster than that of Germany, France and Italy next year.

UK GDP growth is now expected to slow to 1.3pc in 2017, some 0.9 percentage points below what had been pencilled in in the IMF's previous round of forecasts. With the exception of Nigeria, the UK’s 2017 growth forecast received the sharpest downgrade of any of the 16 economies assessed by the IMF.

Maury Obstfeld, the IMF’s chief economist, said that the UK’s decision to withdraw from the EU had added “downward pressure to the world economy at a time when growth has been slow”.

He said that “the direct effects specifically due to Brexit are greatest in Europe, especially the UK”.

Despite the downgrade, economic growth in Britain will still outstrip Germany and France, whose economies are expected to expand by 1.2pc next year. The UK will also beat Italy, where GDP is forecast to rise just 1pc.

The figures were part of a wider IMF report on the global economy. The fund's economists said the result of the EU referendum would contribute to slower global growth both this year and next. Economists now anticipate world GDP growth of 3.1pc this year, and 3.4pc in 2017, having shaved 0.1 percentage points off both estimates.

David Fuller's view

Here is a PDF of the article.

IMF forecasts have the virtue of being frequently revised.  Nevertheless, this opening premise above makes sense to me.

The UK’s economy understandably suffered from Referendum torpor and a lack of preparation for the Brexit result.  That weakened 2Q and at least the beginning of 3Q GDP, but we now have a new and energised government, led by a well-regarded Prime Minister in Theresa May.  Her government is likely to benefit from at least a brief honeymoon in the eyes of a relieved public. 

UK corporations, which were mostly against Brexit for reasons of uncertainty and the short-term hit to profits, will be energised by Sterling’s competitive advantage.  While Remain voters accounted for 48% of the outcome, their support was mostly lukewarm.  Leave voters at 52% of the electorate are mostly delighted by the prospect of regaining self-governance.  It is a new dawn for a country which wishes to remain a constructive, albeit independent, ally of European neighbours, while also redeveloping trade links with other successful economies all over the world. Over the medium to longer term I think the UK economy will surprise on the upside more often than not.

It would be foolish and narrow minded not to wish Europe well, and I do.  However, it faces more of a train wreck than a new dawn.  The drive for a European super state has little public support.  The single currency without a Federal Europe has predictably been an economic disaster, not least in Southern Europe.  Germany probably most regrets the loss of the UK from the Euroland project, not least as it had the region’s second largest economy.  The divisions between Central and Southern Europe, and now Eastern Europe, are wider than ever.  Northern Europe prefers its own alliance. 

Cutting losses is never easy, especially when the USA has been encouraging the European project, albeit in its own interests and naively in terms of EU governance.  Nevertheless, the European Economic Area (EEA) worked rather well without the single currency and the increasing grasping European Court of Justice, even if the EEA was only a Trojan horse for the now failing European Union.   

Is this reflected by relative stock market performances?  For the UK I will use the FTSE 250 Midcaps Index because it does not have the big weightings of foreign shares.  It has been a strong performer since the 2008 lows but peaked in 2Q 2015 and needs 17,470 to break the progression of lower rally highs.  I think it will do that with the help of a more competitive currency. 

In contrast, the German DAX Index is somewhat weaker but potentially building support prior to a break this year’s rally highs just above 10,500.  France’s CAC Index is somewhat weaker and remains within its downtrend, although the February lows have held to date.  Italy’s SPMIB Index is weaker still and the best I can say is that it looks somewhat oversold. 

My conclusion: on a 1-year time frame the UK is a recovery candidate, and possibly Germany as well.  France is likely to underperform and Italy is worrying.