A damaging haemorrhage of jobs from the City has been averted by the signing of a Brexit transition agreement between the UK and the EU, according to an upbeat assessment of the economy’s prospects from Philip Hammond.
Speaking in Washington, the chancellor said the mood among big US-owned financial institutions was much more positive than it had been before London and Brussels agreed to a 21-month implementation period after the UK officially leaves the EU next March.
“I have been in New York this week meeting the major players in the financial sector,” said Hammond. “We have been in constant contact since autumn 2016. They are not putting out the bunting but they are much more relaxed.”
Hammond said firms had taken precautionary measures but were delaying taking any further steps.
“They have seen the commitments on an implementation period and they are waiting to see how we deliver that,” he added. “We have dammed the flow and avoided what could have been a haemorrhaging of jobs from the UK into the EU.”
The chancellor said the implementation period was especially important for regulated sectors of the UK economy such as financial services, pharmaceuticals and aviation.
Hammond’s comments came during the spring meeting of the International Monetary Fund. The IMF said this week that the UK was one of the few developed countries not to be benefiting from the global upswing in growth.
What is the IMF?
The International Monetary Fund, created in 1945, is an organisation of 189 countries based in Washington DC. It is governed by, and accountable, to member countries.
Its goals are to ensure the stability of the international monetary system (exchange rates and international payments), to secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
The IMF has bailed out scores of countries over the years, including the UK in 1976 when the minority Labour government borrowed £2.3bn from the fund to stabilise the value of the pound; Iceland in 2008; and Greece in 2010, 2012 and 2015.
The number of bailouts of African countries has also increased in recent years as states became more vulnerable to commodity price crashes.
The IMF was conceived at a UN conference in Bretton Woods in the US in July 1944 to build a framework for economic cooperation to avoid the devaluations that contributed to the Great Depression of the 1930s.
Most funds for IMF loans are provided by members via payments based on their position in the world economy, although the IMF can also borrow. Its decision-making also reflects members’ relative influence. The Fund, as it is known, is one of the world’s biggest holders of gold.
Mark Carney, the governor of the Bank of England, dampened expectations of an increase in official interest rates next month by pointing out that the recent economic data had been softer than expected. Carney’s comments led to a fall in the value of the pound.
Hammond, who has faced criticism since becoming chancellor for being too downbeat about the economy, said he was optimistic that the UK would outperform the forecasts for growth of about 1.5% from both the IMF and the independent Office for Budget Responsibility.
“I am Tigger-ish,” Hammond said. “We have passed an important milestone. Debt is falling as a percentage of GDP. At last we have got to the point where debt is going down. Inflation has fallen sharply and earnings are continuing to rise so we are back to rising real wages. The most important metric for ordinary families is real wage growth.”
Hammond, who backed remain during the 2016 referendum, said Brexit had led to a dampening of UK growth.
“I have constantly said that the Brexit vote and the process that flows from it is a source of uncertainty,” he said. “The reaction to that uncertainty is to slow investment and that’s what we’ve seen.
“Business investment is lower than it would otherwise have been. Consumers have been more cautious than they otherwise would have been. We have a very tight labour market but wage pressures are lower than might have been expected.
“I recognise that forecasts for the economy reflect that uncertainty. Our challenge is to deliver a positive shock, a better outcome than is priced in to the OBR forecast. I am confident that later in the year we will be able to do that.”
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In the wake of this week’s House of Lords vote calling on the government to investigate the possibility of the UK staying in a customs union with the EU, Hammond said: “I do not think staying in the customs union or a customs union is the solution for the UK, but a very close customs relationship with the EU should be part of any future agreement to avoid tariff barriers.”
The chancellor said there were two constraints for the government – avoiding a hard border between Northern Ireland and the Republic of Ireland, and ensuring the free flow of goods between Dover and Calais.
“How we do that is a subject of discussions,” he said. “We have put forward two proposals and we are seeking to evolve them, both at a negotiating level and at a technical level.”