IMF downgrades UK growth forecast - again

Although the forecast for the UK in the short term is grim the IMF improved prospects for the British economy in the coming years, ITV News Business Editor Joel Hills reports

The International Monetary Fund’s (IMF) latest assessment of the health of the global economy is in many ways encouraging.

Around the world, inflation continues to fade and economic growth is slowly picking up.

“Despite many gloomy predictions, the world avoided a recession,” celebrates the IMF’s chief economist, Pierre-Olivier Gourinchas.

Better still, in his view, there’s precious little evidence of “uncontrolled wage-price spiral”.

The cost of living crisis may not quite be over but the IMF expects price rises to slow further and “in the second half” of this year it believes central banks to begin the process of cutting interest rates.

The UK government has a lot riding on an improvement in our economic fortunes.

An election looms and the Conservatives are badly adrift in the opinion polls.

The party’s great hope is that, come the autumn, the technical recession of 2023 will be a distant memory and voters will increasingly be feeling better off again.

Cheaper mortgages look a realistic prospect and disposable incomes are already starting to increase as wage growth outpaces consumer price inflation but the scale of the “bounce back” the IMF envisages is under-whelming and not one you’d want to hang a campaign strategy on.

Economic growth in the UK is expected to register 0.5% this year, a slight downgrade from the 0.6% the IMF forecast in January.

Of the G7 advanced economies, only Germany (0.2%) is forecast to fare worse.

In the IMF’s eyes, the UK’s prospects improve in 2025 when output is projected to expand by 1.5% - the third highest in G7, ahead of France and Germany.

Any benefit will come too late for the election.

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The global market prices of energy and food which sent inflation up into the stratosphere are now pulling it back down to earth and with some velocity.

The IMF believes soft landings all-round look likely.

All the arrows are gradually starting to point in the right direction. Financial credit conditions are easing, share prices are rising again, and consumer and business confidence is recovering.

And the IMF now believes the permanent scarring the pandemic caused is less severe than it initially believed.

“We are not there yet,” cautions Gourinchas. There’s a lot that could still go wrong.

In some countries, inflation in the price of services looks “stubbornly high” and wage growth is inconsistent with bringing inflation sustainably back to target.

Labour shortages persist in both the US and the UK. In our case, the IMF believes that the size of the workforce has caused inflation to be higher than elsewhere and is restricting the ability of the UK economy to grow.

There are plenty of other reasons to be cautious about what happens next.

The conflict in the Middle East hasn’t yet triggered another spike in energy prices but it could do.

China’s troubled property market has the potential to harm China’s growth that of its trading partners.

Many governments have spent vast sums saving jobs during the pandemic and subsiding energy bills after Russia invaded Ukraine.

National debt has risen and the cost of servicing it has increased sharply.

The IMF wants countries to “rebuild fiscal buffers,” to rebuild their reserves to deal with future economic shocks, although it recognises this is easier said than done.

Three months ago, the IMF warned the UK that now was not the time to be cutting taxes, indeed it suggested that taxes probably needed to rise.

The IMF recommended the chancellor prioritise debt reduction and investment in public services which are showing clear signs of strain.

In his Budget last month, Jeremy Hunt used a small improvement in the outlook for borrowing to finance a cut to National Insurance. He chose not to improve funding for public services.

The IMF doesn’t offer an opinion on the decision to reject its advice.

A HM Treasury Spokesperson said: "Today's report shows we are winning the battle against high inflation, with the IMF forecasting that it will fall much faster than previously expected.

"The forecast for growth in the medium term is optimistic, but like all our peers, the UK's growth in the short term has been impacted by higher interest rates, with Germany, France and Italy all experiencing larger downgrades than the UK.

"With inflation falling, wages rising, and the economy turning a corner, we have been able to lower taxes for 29 million people, as part of our plan to reward work and grow the economy."

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