IMF's Lagarde says pre-Brexit warnings vindicated by slower UK growth

By Andy Bruce and David Milliken

LONDON (Reuters) - Britain's economy is already suffering from last year's vote to leave the European Union - fulfilling previous warnings that Brexit supporters had dismissed as too gloomy, International Monetary Fund chief Christine Lagarde, said on Wednesday.

Before the June 2016 referendum, Lagarde had said Brexit would have "pretty bad to very, very bad" consequences for Britain, angering Brexit backers who viewed the body as exceeding the limits of its expertise.

Speaking in London as she presented the IMF's first full assessment of Britain's economic performance since the Brexit vote, Lagarde said British growth was "a bit of a disappointment" compared to strength elsewhere in the world.

"The UK economy is already losing out as a result of this decision," she said at a news conference alongside finance minister Philip Hammond. "That narrative we identified as a potential risk in May 2016 is actually being rolled out as we speak. It's not experts talking - it is the economy demonstrating that," Lagarde said.

Firms were delaying investment until they had more clarity about future trade rules, and she urged Britain and the EU to reach a deal soon on transitional arrangements for March 2019.

The IMF said Britain's economy was set to grow by around 1.5 percent in 2018, in line with its previous forecast, after growth of 1.6 percent in 2017, slower than in many other advanced economies. The forecast for 2018 was based on the assumption that Brexit negotiations continue to make progress.

In its report on Britain's economy, the IMF said Britain may need to raise more money from taxes to bring down its budget deficit after relying heavily on squeezing public spending.

"Deficit reduction since the financial crisis has relied mostly on spending measures," the IMF said.

"While the government should continue to seek the best value for money in public spending, a more balanced approach to deficit reduction may be called for in future," it said.

The impact of Brexit on the economy and Britain's low productivity growth could hit tax revenues, while demands on public spending would increase as the country's population grows older.

"Under these circumstances, greater reliance on revenue measures for consolidation (of the budget) than in recent years may be warranted," the report said.

Finance minister Hammond said he shared the IMF's concerns about Britain's high levels of public debt.

The report also welcomed recent progress in the Brexit talks with Brussels but said the timeframe for negotiating a new trade deal was ambitious.

(Additional reporting by William Schomberg)