IMF upgrades UK growth prospects but warns interest rates 'likely' to rise further
The IMF has predicted that interest rates may have to be raised again and remain higher because of high inflation, ITV News' business and economics editor Joel Hills has the latest
The chancellor has complained in the past that the International Monetary Fund (IMF) has a tendency to under-estimate the UK economy.
This morning, the IMF has admitted that our prospects look brighter than it was predicting only last month - upgrading its forecast for UK growth this year by 0.7%.
If the IMF is right, then the UK economy will grow by 0.4% in 2023 - that’s stronger growth than Germany is expected to manage but still weaker than the IMF’s forecasts for Italy, France, Japan, Canada or the United States.
“Resilient demand” and “declining energy prices” have prompted the IMF’s rethink. So too has “improved confidence amid somewhat reduced post-Brexit uncertainty” - a fairly clear reference to the Windsor Framework agreed between the UK and the EU in February.
Encouraging stuff, but the bigger UK picture remains that of an economy which is expected to edge along in a very low gear, this year and next.
In the IMF’s view, reviving growth in the long-term depends on success in tackling the “post-pandemic rise in labor (sic) inactivity” and “removing impediments to business investment” - issues the chancellor sought to address in his recent Budget.
The prospect of the UK avoiding a recession is, of course, something to celebrate. The IMF’s view on the stubbornness of inflation is less welcome.
The UK is already experiencing the sharpest cycle of interest rate increases since the 1980s. The Bank of England has raised Bank Rate by almost 4.5% in the space of 18 months.
The IMF notes that the full force of these hikes won’t be felt until the back half of this year but it sees signs that inflation is feeding itself domestically in the UK and believes the cost of borrowing will have to rise further to contain it.
The IMF’s Article IV mission concludes that inflation is showing “greater than expected persistence” and will only fall to 5% by the end of the year. The IMF thinks it will take until 2025 for the headline rate to ease below 2% (the Bank of England’s target).
“Monetary policy will need to remain tight to keep inflation expectations well-anchored,” says the IMF.
“Some further monetary tightening will likely be needed, and rates may have to remain higher for longer to bring down inflation more assuredly."
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Mr Hunt, responding to the IMF's report, said: “Today’s IMF report shows a big upgrade to the UK’s growth forecast and credits our action to restore stability and tame inflation.
“It praises our childcare reforms, the Windsor Framework and business investment incentives. If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy...but the job is not done yet.”
The UK currently has the highest rate of inflation in the G7 economies. The regulation of utility prices in the UK helps to explain why consumer prices were slower to react to changes in wholesale (market) gas prices.
We should note that the IMF has warms words for much of what the government is doing to tackle inflation, stabilise debt and raise growth.
In it’s view, under Rishi Sunak and Jeremy Hunt, fiscal credibility has been “successfully re-establish[ed] following the September ‘mini-budget’ stress episode” - which is an interesting way of describing the blow-out in the bond market last autumn which brought down Liz Truss’s government.
The IMF now thinks the government is on track to meet its fiscal rules (to stabilise national debt and keep the deficit below 3% of national income by 2028).
Many Conservative MPs continue to agitate for tax cuts but the IMF doesn’t seem to think there will be any scope for fiscal loosening in the next year or two. Indeed, if the chancellor does find himself in a position of unexpected windfalls the message from the IMF is “borrow less, don’t spend it”.
The IMF appears to feel that any pre-election give-always would risk adding to inflation in the economy and are best avoided.
In the medium term, the IMF says tough decisions lie ahead on spending (more money for the NHS, more money to settle strikes in the public sector and more funding for hard-pressed government departments).
And it politely suggests ways in which the tax system could be made smarter (ditching Stamp Duty and the triple-lock on pensions).
What is heartening here is that the IMF seems to believe in “immaculate disinflation” - that the rampant price rises we have experienced can be tamed without triggering a recession and the government will succeed in its objective to stabilise rising debt.
And the IMF’s projection of UK “trend growth” of 1.5% a year, while unheroic, isn’t too shabby at all. It’s certainly higher than the Bank of England currently assumes.
Chancellor Hunt has recently lamented what he perceives to be a narrative of “declinism” which has sprung-up about the UK of late.
There’s no sign of declinism in the IMF’s latest assessment of the UK economy. Indeed, its central forecast looks rather promising. That said, it’s worth noting that all the risks seems to be pointing to what economists call “the downside”.
Put another way: if we’re proved wrong, it’s because we’ve been too optimistic.