IMF upgrades UK growth as its cuts rest of the world

In what will be seen at the Treasury as a vindication of its decision to ignore the IMF’s recent call for a Plan B, the Bretton Woods institution lifted its forecast for GDP growth this year from 0.7pc to 0.9pc. Its outlook for 2014 was held at 1.5pc.

The forecasts for Britain now stand head and shoulders above its major European peers, with Germany the closest at 0.3pc growth this year and 1.3pc next. The eurozone as a whole is expected to shrink 0.6pc in 2013, compared with a forecast decline of 0.3pc in April.

Underlining the improving UK outlook, the respected National Institute of Economic and Social Research (NIESR) estimated that the economy grew 0.6pc in the three months to June – even after weak manufacturing figures for May published yesterday.

The IMF appeared to target the UK at its Spring economic outlook, when chief economist Olivier Blanchard warned George Osborne that he was “playing with fire” and should “consider adjustment to the original fiscal plans”. The following month, the fund urged the Government to abandon austerity for a year and borrow as much as £10bn extra for infrastructure spending.

The Chancellor rejected the recommendation, since when the economic data have picked up markedly. Growth in the first quarter beat forecasts at 0.3pc and, according to NIESR, is on course to top expectations again. The think-tank’s prediction was made despite a surprise 0.8pc dip in manufacturing output in May, according to the Office for National Statistics.
The EEF, the manufacturers’ organisation, conceded that the latest official figures “cast a bit of a cloud over the positive run of industry data in recent months”.

However, official trade figures released yesterday showed that exports of goods rose in the three months to May, aiding hopes for a “rebalancing”. Importantly, the rise was dominated by non-EU exports, which increased by 4.6pc to a record £39bn for the three months.

Overall, the deficit in goods was slightly worse than expected at £8.49bn as imports also rose. Including the surplus in services, the overall deficit was £2.4bn in May compared with £2.1bn in April.

Surveys this week have signalled that the housing market is roaring back to life and that consumers are feeling confident enough to spend more at the shops. Raising the prospect of greater private sector investment, company finance directors are currently more comfortable taking risk onto their balance sheet than at any time since 2007, according to a survey by Deloitte.

Although better than April, the IMF’s outlook for the UK is still worse than in January when the IMF was forecasting 1pc growth this year. At 0.9pc, it has simply drawn its outlook into line with consensus to reflect the better-than-expected 0.3pc growth of the first three months and expected 0.5pc expansion in the second quarter.

Thomas Helbling, division chief for the IMF’s world economic studies, doused any renewed sense of optimism in the UK, though, claiming that 0.2pc is a “usual revision” at this stage in the year and explaining that it merely reflected the better than expected data already released.

Asked whether the upgrade had any implications for the IMF’s recommendation for the UK, he said: “I don’t think it changes the big picture for the UK – namely that the recovery is weak and that policymakers should ensure that the recovery is improved.”

In its outlook statement, the IMF stuck to its position that governments should spend more now to entrench growth while setting out a clear “medium term” road map to get the public finances in order.

“Key advanced economies should pursue a policy mix that supports near-term growth, anchored by credible plans for medium-term public debt sustainability. This would also allow for more gradual near-term fiscal adjustment,” it said.

The broader picture from the IMF was disappointing, however. It cut its global outlook by 0.2 percentage points both this year and next, to 3.1pc and 3.8pc respectively.
The downgrade reflected a slowdown in the US from 1.9pc to 1.7pc this year and from 3pc to 2.7pc next year, as well as a 0.3 percentage point cut in emerging markets’ growth for both years, to 5pc and 5.4pc respectively.

The IMF said that countering the worsening headwinds “will require additional policy action” and further “do-what-it-takes” interventions in the eurozone to “keep [risks] at bay”.
“Downside risks, old and new, still dominate the outlook,” it said. “Although imminent tail risks in advanced economies have diminished, additional measures will be needed to keep them at bay, including timely increases in the US debt ceiling and continued ‘do-what-it-takes’ action by the authorities of the euro area to mitigate and reverse financial fragmentation.”
In what appeared to be a recommendation targeted at the US, where the latest quantitative easing programme (QE) is expected to be slowly wound down from September, the IMF said: “With low inflation and sizable economic slack, monetary policy stimulus should continue until the recovery is well established.”

However, Mr Blanchard remained sanguine about the recent market turmoil following the QE “tapering” threat, claiming it was “a repricing episode” that should now settle down, though he was careful to say “one can not rule out further attacks of the nerves”.
To calm markets, policymakers should set out “clear” exit strategies from QE and deal with any bubbles through banking supervision. “Potential adverse side effects should be contained with regulatory and macroprudential policies,” the IMF said. “Clear communication on the eventual exit from monetary stimulus will help reduce volatility in global financial markets.”

In an apparent endorsement of the UK’s recent efforts to identify the bad assets on UK bank balance sheets and force lenders to recapitalise, the IMF said: “In the euro area, a bank asset review should identify problem assets and quantify capital needs, supported by European Stability Mechanism direct recapitalisation where appropriate.”

The eurozone is expected to perform so poorly in part because European governments are allowing “delays in policy implementation”. In an alarming comment, Mr Blanchard also warned that “somethng else” may be going on. “A general lack of confidence in the future may be self-fulfilling, which is worrisome,” he said.

A Treasury spokesman said: “The IMF has confirmed that the UK economy is moving from rescue to recovery, revising up its growth forecast for this year. But the IMF again warns of the continued risks to the global economy, showing that the recovery cannot be taken for granted.”

Ed Balls, Shadow Chancellor, said: “These forecasts confirm that, after three years of flatlining, the IMF believes Britain’s economic recovery will remain weak. While this year’s figure has been revised up, it is disappointing that this is still a lower forecast than the IMF was making at the start of this year.”