A messy Brexit could have “significant consequences” and represents the biggest short-term risk to the British economy, although all Brexit outcomes imply costs, IMF managing director Christine Lagarde told Portugal’s state council on Friday.
Lagarde was invited to participate in the state council, which is the Portuguese president’s highest consultative body, which discussed Brexit.
“A disorderly Brexit could also have significant consequences,” Lagarde told the council, according to a copy of her speech provided by the IMF.
“All likely Brexit outcomes will involve net costs for the UK economy, but the higher the impediments that arise in the new relationship with Europe, the higher the cost,” she said.
Just a few weeks remain before Britain is due to leave the EU on March 29, but the government of British Prime Minister Theresa May is still seeking changes to her Brexit deal to win backing from parliament.
Lagarde said the “most significant near-term risk to the UK economy” was leaving the EU without a deal and a framework for the future relationship with Europe.
Others in Europe will be affected by Brexit to “varying degrees,” she said.
“Ireland, of course, and others such as the Netherlands, with a close relationship to the UK,” she said.
Portugal, whose largest tourist market is Britain, might also be affected if Brexit is disorderly.
“Important trade and tourism links could be disrupted, and a loss of financial market confidence outside your borders could lead to higher sovereign and bank interest rates, which would weigh on growth,” Lagarde told the council.
Turning to the global economy, Lagarde repeated previous statements that the expansion is slowing faster than expected.
“We are not staring at a recession, but downside risks have clearly risen,” she said, listing rising trade tensions, high global debt levels and slower growth in China.
Lagarde said that a transition of the Chinese economy to more sustainable growth is positive, but there is a risk that the deceleration is “faster than expected.”
“Even if new stimulus in China is effective, it is being targeted at relatively less import-intensive activities, so the rest of the world might still feel a deceleration,” she said.
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