IMF warns against no-deal Brexit, as trade war fears weigh on markets - as it happened

And finally, a quiet day’s trading on Britain’s stock market has ended.

The FTSE 100 index closed just two points lower at 7,302 (or down a barely noticeable 0.03%).

Fiona Cincotta of City Index says the US-China trade dispute kept a lid on shares today.

The FTSE had a slightly choppy day, with a mid-morning recovery cut short by the US markets starting to slide as US-China tensions escalated again.

A set of different media reports is coming from the US, most of them still unconfirmed, saying that the US might tone down its initial plans to introduce a 25% tariff on $200 billion worth of Chinese goods and instead bring in tariffs of only 10%. Other news reports are more prominently carrying President Trump’s comments about how the tariffs have put the US in a good negotiating position. Amidst all of this China is saying that it will respond in kind to any US move but more worryingly is threatening to walk away from near term negotiations altogether, which would cement the tariff system for the time being.

The trade tit-for-tat is keeping the markets in Europe, Asia and the US on their toes over the possible escalation of the conflict and is deflecting focus from any other underlying regional drivers, such as the fundamentally fairly strong state of the US economy. The dollar is weaker against the pound, the euro and the yen and is just holding the line against the Canadian dollar.

And on that note, goodnight! GW

The Labour Party has now weighed in, urging chancellor Philip Hammond to hammer home the IMF’s warning to his cabinet colleagues.

John McDonnell MP, Labour’s Shadow Chancellor, says:

“Today the IMF has underlined the warnings that we’ve already heard from trade unions and business organisations about the damage that a cliff edge Brexit would do to our economy.

“Once again I call on the Chancellor to show some leadership and make it clear to his colleagues that he will not accept a no deal Brexit and the damage it risks doing to jobs, wages and living standards in this country”.

Time for a recap:

The International Monetary Fund has warned that Britain’s economy will be hit hard if the country leaves the EU without a deal.

In its latest assessment of the UK economy, IMF managing director Christine Lagarde said a no-deal Brexit would hit growth and weaken the pound.

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She told a press conference in London that:

“If that happened there would be dire consequences. It would inevitably have consequences in terms of reduced growth, an increase in the [budget] deficit and a depreciation of the currency.

“In relatively short order it would mean a reduction in the size of the economy.”

The IMF warned that the UK economy will be permanently smaller after Brexit, regardless of the flavour, compared to staying in the EU and enjoying frictionless trade.

The Fund also warned that Britain faces a “daunting” list of tasks to clear before Brexit in March 2019, adding:

The massive scope of work that remains and the limited time before the UK exits the EU would likely leave preparations incomplete on departure day despite even the most determined efforts.

In a pointed nod to some of his own colleagues, chancellor Philip Hammond said the UK must heed Lagarde’s warning and ensure a close relationship with the EU for the future. Otherwise, Hammond claims, the UK could lose the progress made since the financial crsisis.

Stock markets in Asia have fallen, following reports that America could impose tariffs on an extra $200bn of Chinese imports this week. The Shanghai stock exchange has hit its lowest level since 2014, as trade war fears swept local exchanges.

Donald Trump has ratcheted up the pressure, warning that countries who don’t play fair will be “tariffed”....

In a worrying sign for Britain’s auto industry, 3,000 staff at Jaguar Land Rover’s plant at Castle Bromwich are moving to a three-day week.

My colleague Rob Davies reports:

The news came hours after the carmaker was accused of “scaremongering”about the impact of Brexit by a Conservative MP. JLR, owned by the Indian conglomerate Tata, said it had made the decision to reduce production in the light of difficult conditions in the automotive industry, amid sluggish demand.

A spokesperson said: “In light of the continuing headwinds impacting the car industry, we are making some temporary adjustments to our production schedules at Castle Bromwich.

Just in, growth in New York’s factory sector has slowed this month.

The Empire manufacturing index of business conditions has dropped to 19 this month, sharply down on August’s 25.6. Firms reported a slowdown in new orders, and a rise in costs -- perhaps a sign that the trade war is hurting.

The IMF have now uploaded Christine Lagarde’s opening statement at today’s Article Four press conference on the UK economy.

Here’s the key section, on Brexit:

For the UK, we are projecting growth of about 1½ percent this year and next , down from about 1¾ percent in 2016 and 2017. As we noted last year, Brexit-related effects are the driving factor for the slowdown in growth since the referendum. This has occurred despite strong policy frameworks and implementation. Uncertainty about the future economic environment has weighed on investment, despite still robust global growth and easy financing conditions, while the post-referendum depreciation of sterling has depressed real income growth and consumption. While exports have picked up thanks to the weaker currency, they have not done so by enough to prevent an overall slowing of growth. Despite the more modest growth, however, employment continues to reach record levels, and the unemployment rate is near historic lows.

Our projections assume a timely agreement with the EU on a broad free trade pact and a relatively smooth Brexit process after that. A more disruptive departure will have a much worse outcome. Let me be clear: compared with today’s smooth single market, all the likely Brexit scenarios will have costs for the UK economy , and to a lesser extent for the EU, as well. The larger the impediments to trade in the new relationship, the costlier it will be. This should be obvious, but it seems that sometimes it is not.

We should not understate the progress that has been achieved in the Brexit negotiations , most notably the tentative agreement on an implementation period. But many critical issues remain unresolved, most significantly a political agreement on the future economic relationship between the UK and the EU and the status of the Irish land border. We encourage both the UK and the EU to work diligently to reach agreement on these open issues to avoid a very costly cliff edge Brexit.

The BBC have helpfully tweeted two video clips of Christine Lagarde speaking this morning.

Here she is, explaining how all the possible Brexit scenarios have a cost for the UK economy, and Europe too.

And here’s Lagarde on the specific negative consequences of a no-deal Brexit.

Theresa May’s official spokesman has played down the IMF’s claim that a no-deal Brexit would be very costly for Britain.

The Press Association has the details:

Chancellor Hammond said the report underlined the need for a Brexit deal to ensure the economic gains of the past decade were not lost.

“We are at a critical juncture for the UK economy. Despite the contingency actions we are taking, leaving without a deal would put at risk the substantial progress the British people have made over the last 10 years,” he said.

Downing Street stopped short of an explicit endorsement of Mr Hammond’s warning.

When asked whether the Prime Minister backed her Chancellor’s assessment, Theresa May’s official spokesman told reporters: “The PM said very clearly that she believes our best days are ahead of us and we will have plans in place to allow us to succeed in all scenarios.”

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Geraint Johnes, Professor of Economics at Lancaster University Management School, has warned that the IMF’s new forecasts could be too optimistic.

“The IMF forecast of 1.5% growth for UK GDP both this year and next comes on the same day as some even more pessimistic forecasts from the British Chambers of Commerce (who are now forecasting 1.1% and 1.3% growth in 2018 and 2019 respectively). In both cases, risks posed by Brexit are to the fore.

Professor Johnes is also concerned that Brexit is distracting minister other issues (such as fixing productivity, as Lagarde pointed out this morning)

The IMF emphasises actions which the UK needs to take, specifically in the arenas of productivity and regional development, to stimulate improved growth. While, in the Industrial Strategy and the Northern Powerhouse, the government has measures in place, these have necessarily taken a back seat over the last two years, and renewed efforts are needed.”

Meanwhile in America, Donald Trump is awake...and threatening that countries who don’t trade fairly will be “tariffed”:

(Mr Morici was speaking on Fox and Friends, one of the president’s favourite shows)

Labour MP David Lammy MP says the IMF’s gloomy forecasts prove that the UK should hold a second referendum on Brexit.

Lammy, who supports the Best for Britain campaign, says:

“The IMF report proves beyond doubt that the Tories’ plans would act as a sledgehammer to the UK economy. The substantial costs would weigh disproportionately on those with the least.

“It’s not fair on the most vulnerable in this country. The Prime Minister might try to trumpet this report as a victory for her Chequers plan, but doing so would be to deceive the British people. She and the Brexit extremists who have held a gun to the country’s head should take responsibility for this entire mess.

“No deal would be a nightmare - that’s for certain. We need a people’s vote with the option to stay in the EU.”

Here’s more snap reaction to the IMF press conference.

Reuters has focused on Christine Lagarde’s warning that a no-deal Brexit would be bad for growth:

Shehab Khan of the Independent fears the impact of Brexit on the UK people:

The BBC’s Katie Hile points out that Lagarde hasn’t given up hope that a Brexit deal will be reached:

I missed this point earlier, but the IMF may also be preparing to cut its global growth forecasts:

Q: You says Britain faces “daunting’ Brexit challenges, so would a 21-month transition period actually be long enough?

Christine Lagarde replies that any extension to the proposed transition arrangement would be welcomed by those officials charged with negotiating new deals.

And that’s the end of the press conference.

Q: Does the IMF believe there will actually be a Brexit dividend, or not?

Christine Lagarde says Britain faces a short-term cost from Brexit, and a separate long-term dividend, which arrives gradually over time.

But these two may not be the same size, she warns.

Philip Gerson, the IMF’s UK mission chief, weighs in too, warning:

The UK will be permanently smaller [after Brexit], and that means permanently lower revenues.

Q: What should policymakers do, if Britain leaves the EU without a deal?

Lagarde reiterates that a a No deal Brexit would be a severe supply shock to UK economy.

And in that case, she doesn’t think a fiscal response would address the roots of the problem. In other words, don’t expect the government to boost spending.