London: Britain's economy will shrink if it leaves the EU without a Brexit deal and it will suffer some damage whatever terms it agrees, the IMF said on Monday, challenging the promises of some Brexit supporters.

It predicted Britain's economy would grow by about 1.5 per cent a year in 2018 and 2019 - lagging behind Germany and France - if a broad Brexit agreement was struck.

"I'm a desperate optimist, and I very much hope and pray that there will be a deal between the EU and the UK," IMF managing director Christine Lagarde said.

But failure to get a deal would lead to a contraction, she said. "Let me be clear, compared with today's smooth single market, all the likely Brexit scenarios will have costs for the economy and to a lesser extent as well for the EU," Lagarde said as the IMF presented its annual report on Britain's economy.

"The larger the impediments to trade in the new relationship, the costlier it will be. This should be fairly obvious, but it seems that sometimes it is not."

Britain is supposed to leave the EU in little more than six months' time but London and Brussels have yet to strike a deal to secure a transition period.

Prime Minister Theresa May has struggled to bridge a deep divide within her Conservative Party about how close a relationship Britain should have with the EU. She is hoping to make progress towards a deal when she meets fellow EU leaders this week.

British finance minister Philip Hammond, speaking alongside Lagarde, said the government had to heed the "clear warnings" from the IMF of a no-deal Brexit.

Hammond has been criticised by some Conservative Party lawmakers who say he wants to keep Britain too close to the EU.

Many Brexit supporters say Britain must distance itself from Brussels in order to strike its own trade deals with fast-growing economies around the world.

The IMF said those kind of deals would not offset the drag to the economy from leaving the EU.

Ruth Lea, an economist with Arbuthnot Banking Group and a Brexit advocate, accused the IMF of joining a new round of "Project Fear", a term Brexit supporters use for pre-referendum warnings of the economic consequences of a Leave vote. Reuters