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 said firms are likely to continue deferring investment decisions until there is greater clarity on the UK’s future trading relationship with the European Union.
Speaking in London, IMF managing director Christine Lagarde said even though Britain has not yet left the EU, it is already having an adverse impact on the economy.
She said: “Since the start of this year, growth has slowed notably. The significant depreciation of sterling that followed the referendum has pushed inflation over 3%, squeezing real incomes and private consumption.
“Companies are also delaying some investment decisions until they have greater clarity about post-Brexit trade rules.”
She added that Britain is likely to face significant fiscal pressures, and a slowing economy will mean less cash for public spending,
“These challenges are likely to become even more acute if trade barriers further reduce productivity.
“Taken together, these developments mean the UK may in the future about the size of the public sector and the mode of delivery and financing of public services.”
While the IMF welcomed “recent progress” in the Brexit negotiations, it flagged tough choices for the Government on the road ahead, as it grapples with a potential loss of tax revenues from the financial sector and slower productivity growth.
The IMF’s outlook follows a bleak update on the nation’s economic prospects from Britain’s fiscal watchdog in November, which flagged the damaging effects of “stubbornly flat” productivity growth and weaker business investment.
The Office for Budget Responsibility (OBR) said the Government may not eradicate the deficit before 2031, as it slashed GDP forecasts from 2% to 1.5% for this year, from 1.6% to 1.4% in 2018, and from 1.7% to 1.3% in 2019.
Responding to the IMF study, Chancellor Philip Hammond said it underlined the need to avoid a “cliff-edge” Brexit.
He said: “One of the biggest boosts we can provide to the economy - the economy of the UK and the economy of the EU27- is making early progress on delivering certainty and clarity about our future relationship with a time-limited implementation period agreed at the earliest opportunity.”
The Office for National Statistics (ONS) confirmed last month that gross domestic product (GDP) had grown by 0.4% between July and September in its second estimate of third quarter growth.
While this proved an increase on the 0.3% expansion seen in the first and second quarters of the year, the economy is struggling to accelerate to levels seen in the final quarter of 2016 when GDP rose by 0.6%.
Ms Lagarde said the IMF report bore out their warnings in May 2016 about the likely impact of Brexit.
She added: “I don’t think we are particularly gloomy about the UK economy. This was said a year and a half ago but regrettably the numbers we are seeing the economy deliver today are actually proving the point we made a year and a half ago when people said ‘You are too gloomy, you are one of those experts’.
“Unfortunately we were not too gloomy. We were pretty much on the mark. Our forecasts actually turned out to be the reality of the economy.”