Upgraded but still in the slow lane: IMF on the UK's economic prospects

No longer the dunce but still under-performing versus our peers.

The International Monetary Fund (IMF) has just published its latest assessment of our economic prospects and there are some encouraging signs of progress.

The UK economy is now expected to grow by 0.4% in 2023 - a chunky upward revision of 0.7%.

In the face of persisting high inflation and a sharp rise in interest rates, households and businesses are proving more resilient than the IMF expected only three months ago.

Consumption and expenditure are holding up. The IMF repeats its view that the Windsor Framework - agreed between the UK and the EU in February and adopted in March - has made Brexit less of a dragging anchor.

The whole “UK Has A Particularly Bad Dose Of Stagflation” narrative, which has been developing over the last eighteen months, is shifting in subtle but important ways.

The IMF’s revision shows that, in its view, the gap between the UK’s fortunes and those of the other countries we like to compare ourselves with - the US, Japan, Germany, France - has narrowed. But a gap still exists.

Like Admiral Nelson, the government, for understandable political reasons, continues to turn a blind eye to the data but the pattern is pretty clear.

The UK has the highest headline rate of inflation of the G7 economies (and by quite a long way), the highest rate of core inflation and, along with Germany, was the last advanced economy to return to its pre-pandemic size.

The latest IMF forecast has the UK as the second slowest G7 economy this year (ahead of Germany) and the joint- second slowest next year (ahead of Italy and in line with US and Japan).

This matters, of course, because it means that living standards here are getting squeezed more tightly than elsewhere. It also makes it more likely that inflation in the UK feeds itself domestically and that interest rates have to rise higher to douse them down.

As for the bigger, global picture, the IMF forecast is increasingly optimistic. The Covid pandemic is behind us, international supply chains are mended, food and energy prices have come down sharply, rates of inflation are in decline.

Unemployment is generally low, firms are making healthier profits, wages in “real” (adjusted for inflation) terms look set to begin growing again.

“We have entered the final stage of the inflationary cycle that began in 2021,” says Pierre-Olivier Gourinchas, the IMF’s Economic Councellor and the Director of Research, “but it’s too early to celebrate.”

Interest rates in “major economies” may not need to hit the heights which were expected three months ago but “it is critical to avoid easing prematurely,” he warns.

The IMF thinks inflation will remain above target in 2024 in 89% of countries where inflation targets exist.

This view may prove too pessimistic but there’s a lot that could go wrong too.

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Significantly higher interest rates have been shown to have nasty side-effects, just ask anyone who is trying to refinance their mortgage.

In the face of uncertainty, how should government’s respond? “Maintain financial stability and prepare for stress,” advises the IMF.

As the Office for Budget Responsibility - the government’s own forecaster - has already pointed out, the UK is particularly exposed to higher inflation and tighter monetary policy.

Fitch, a credit ratings agency, calculates that the UK will incur the highest interest bill in the developed world this year on its stock of national debt.

In the IMF’s view now is not the time to be thinking about cutting taxes.