The International Monetary Fund (IMF) has cut its outlook for UK economic growth and warned that Square Mile tax revenues could shrink if banks shift operations overseas following Brexit.
In its annual review of the UK economy, the IMF said UK gross domestic product (GDP) looked set to expand by 1.6% this year, knocking back its prediction of 1.7% growth from October.
However, it stood by previous forecasts for GDP to slow to 1.5% in 2018, as Brexit uncertainty and the inflationary squeeze on household spending power puts the brakes on the UK economy.
The Washington DC-based organisation also warned that Britain’s divorce from the European Union could force the Government to consider further cuts to public spending, as it grapples with a potential loss of tax revenues from the financial sector and slower productivity growth.
The report said: “Despite a strong recovery in global growth and supportive macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand.
“The employment rate has remained around record highs, but the sharp depreciation of sterling following the referendum pushed up consumer price inflation, squeezing household real income and consumption.
“Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilisation, owing to heightened uncertainty about economic prospects.
“Overall, output is expected to grow by 1.6% this year, broadly in line with our estimate of the economy’s potential.”