Dear Chancellor, thank you very much for your kind introduction. Ladies and gentlemen, good morning. It’s always a pleasure to be in London. We are here for our annual review of the British economy, the Article IV consultation. Last time I met with you was in December 2017, so just about nine months ago. At that time, the 2017 cycle had been delayed by the election and taken about 18 months. So, I guess on average we are OK…

Christine Lagarde

How do we see things? As we conduct this consultation, the UK is negotiating its exit from the European Union and the nature of its relationship with the EU after next March. Overcoming differences and reaching a deal with the EU will be crucial to avoid a no-deal Brexit, which would impose very large costs on the UK economy. Indeed, leaving the EU without an agreement on the framework for the future economic relationship and an implementation period to get there is the most significant near-term risk to the UK economy.

Let me start by summarizing how we see the global picture and the UK outlook, then discuss some of the challenges your country is confronting. Our most recent World Economic Outlook, from July, projected global growth of 3.9 percent for this year and the next. But we also pointed out that risks had increased, and that growth appeared to have peaked in some major economies and become less even. We will update these forecasts in early October, during our annual meetings.

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.

In the meantime, preparatory work continues as the UK gets ready for life outside the EU. Here too, there has been progress, as is detailed in the statement.

Nevertheless, the range of issues that remains to be addressed is daunting, and the time left to accomplish them may be very short . This is not some abstract matter. Many of these issues relate to people’s everyday lives, like the ability to travel to Europe, and being able to count on secure access to critical medications produced on the continent. This underscores the great importance of ensuring that the tentatively-agreed implementation period comes into effect. Cooperation and coordination on priority issues will also be important to achieving a smooth transition.

Beyond all Brexit’s complications, the UK has important structural challenges to address as well. Many are common to other advanced economies, like population aging and the pressure that this puts on the budget over the long-term. The concluding statement goes into greater detail.

Let me highlight one particular challenge: very weak productivity growth. In 2016, the average UK worker produced about 25 percent less per hour than an American, French or German worker. As others have observed, this means that by Thursday afternoon the average American, German or French worker has produced as much as the typical British worker will in an entire week. In the long run, boosting productivity in the UK is the key to durably raising living standards.

The UK economy is facing many challenges. But it also has many advantages. It has solid institutions, highly credible fiscal and monetary policy frameworks, and flexible labor markets. And as any student of history knows, Britain can also count on its long and glorious history, and on the indominable spirit of its people. These will all be sources of strength for it as it confronts these challenges.

I am now happy to take your questions.