Britain’s economy is set to underperform compared to major European peers over the next two years as it grapples with Brexit, according to the International Monetary Fund.
The IMF, in its World Economic Outlook, said that business investment is expected to “remain weak” in light of heightened uncertainty over post-Brexit arrangements.
Higher barriers to trade and lower foreign direct investment are also set to weigh as the UK divorces from the bloc.
Economic growth is expected to come in at 1.6% in 2018 and 1.5% in 2019, a slowdown from 1.9% in 2016 and 1.8% in 2017.
The figures show that only Italy among major European nations will perform worse over the next two years.
A spokesman for the Treasury said in response: “Our economy is at a turning point with our national debt starting to fall and the lowest unemployment rate for 40 years.
“We are building an economy that works for everyone by taking a balanced approach to supporting our public services, investing to improve our productivity and helping families keep more of what they earn.”
The IMF also said that the Bank of England should raise interest rates to curb above-target inflation, which has soared since the referendum.
“The unemployment rate in the United Kingdom is close to historic lows; further declines could add to inflation pressure by triggering faster wage growth in a context of inflation that is already above target following currency depreciation after the June 2016 Brexit referendum.
“Gradual monetary tightening is therefore needed to ensure that inflation returns to target and expectations remain anchored.”
The world economy, meanwhile, is on course to notch up the strongest pace of growth since 2011 at 3.9%.
But the organisation’s chief economist warned that the prospect of an escalating trade war “threatens to undermine confidence and derail global growth prematurely”.
Maurice Obstfeld said that economic gains are at risk from “escalating tensions over trade”.
US President Donald Trump, who campaigned on a pledge to protect US industries from what he claims is unfair foreign competition, has slapped tariffs on steel and aluminium imports. He has also proposed imposing tariffs on 50 billion US dollars (£35 billion) worth of Chinese imports.
China has countered by proposing tariffs on 50 billion dollars of US products, including soybeans.
The prospect of a trade war between the world’s two biggest economies has rattled financial markets for weeks.
The IMF also upgraded its forecast for the 19-country eurozone to 2.4% – which would be its best showing since 2007 – and up from the 2.2% it predicted three months ago.