IMF: Prospects for the world economy 'less gloom' but UK forecast downgraded
Predictions state that the performance of the UK economy will be worse, this year, than any other developed nation. Economics Editor Joel Hills has the latest
The International Monetary Fund is not a household name but given its power - it is unique in being the only institution in the world with the mandate and the resources to bail out governments which run into trouble - it is worth paying close attention to what it thinks.Many countries are struggling to deal with the fallout of rising prices and higher interest rates but the IMF thinks that the worst of the cost of living crisis may now be behind us, globally at least.
In its latest World Economic Outlook, the IMF says it believes that inflation has peaked in most countries and that the future looks a little brighter than it did when the IMF last published forecasts in October.
Since then the international market price of energy has fallen significantly, winter in Europe has proved to be relatively mild, households have continued spending (despite feeling poorer) and companies have retained their staff (despite being less profitable). Central banks have raised interest rates but economic growth has proved quite resilient.
"The fight against inflation is starting to pay off,” concludes the IMF’s chief economist, Pierre Olivier Gourinchas, “but central banks must continue their efforts”.
But here’s the rub. While the IMF has upgraded its forecasts for most countries in 2023, it has sharply downgraded its forecast for the UK.
The contrast in fortunes could hardly be starker.
If the IMF is right then the UK will be one of only a few places in the world where the economy is smaller at the end of the year than it was at the beginning.
The predicted fall in GDP of 0.6% in the UK is striking and sticks out in the IMF’s outlook table (even Russia’s economy is forecast to grow) but the forecast is broadly in line with the wider consensus.
Each month, the Treasury publishes a comparison of around thirty independent economic forecasts. Currently, the average forecast is for the UK economy to contract by 0.8% in 2023.
The IMF explains that it expects the UK economy to perform comparatively badly this year due to “tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets”.
IMF chief economist Pierre-Olivier Gourinchas says the UK economy is predicted a 'sharp' fall in GDP of 0.6%
It is worth remembering that the IMF prepared its last forecast in October before the full details of Liz Truss’s mini-budget had been published.
At the time, the IMF assumed taxes in the UK would be cut but not on the scale they were on September 23rd last year. Truss’s mini-budget went on to cause market turmoil, forcing up borrowing costs in the UK to such a degree that she was forced to resign. Most of her tax cuts were quickly reversed by Jeremy Hunt in his autumn statement.
The net effect is that fiscal policy in the UK is now tighter than the IMF was expecting and less supportive of growth.
But the IMF believes we faces other challenges.
The UK is a net energy importer with a high dependance on oil and gas to meet its energy needs - this has left us exposed to higher market prices.
The UK is also in the unusual position of having a workforce that is smaller today than before the pandemic began.
There are around 400,000 fewer people available to work than there were three years ago, partly due to ill-health, partly due to early retirement.
The labour market is “tight” and companies in the private sector are hiking pay to attract and retain staff. The Bank of England fears this risks causing another wave of price rises has responded by raising interest rates - it is expected to do so again on Thursday.
The IMF thinks households in the UK are particularly vulnerable to interest rates rises given how many are on variable rate mortgage rather than fixed deals.
Interestingly, the IMF makes no mention of Brexit as factor in its thinking. The evidence suggests leaving the EU has been a dragging anchor on growth, pushing up prices, flattening business investment and impacting trade.
In its reaction to the IMF’s downgrade, the government (fairly) points out that the UK economy ended up performing rather better in 2022 than the IMF was expecting.
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The government will also be pleased that the IMF thinks the strategy it is pursuing is the right one - that was not the case last October when the IMF was openly critical of Liz Truss’s tax cuts.
We should recognise that economists are not good at forecasting the future with great accuracy and that what matters most is what actually happens next, not what is expected to.
None-the-less, a downgrade by the IMF is not a great look for the UK government, particularly when everyone else’s fortunes are starting to look brighter.
In a statement the chancellor, Jeremy Hunt, said : “The Governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted, however these figures confirm we are not immune to the pressures hitting nearly all advanced economies.
“Short-term challenges should not obscure our long-term prospects - the UK outperformed many forecasts last year, and if we stick to our plan to halve inflation, the UK is still predicted to grow faster than Germany and Japan over the coming years."
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