@IMF ratchets up UK economic growth forecast to 2% (21/04/2560)

21 Apr 2017
54 times

Fund notes stronger-than-expected performance since Brexit vote but warns protectionism may hold back growth The International Monetary Fund has revised up its UK growth forecast for the second time in three months after admitting that the performance of the economy since the Brexit vote last year had been stronger than expected. In its half-yearly World Economic Outlook, the IMF said it now envisaged the British economy expanding by 2% in 2017 – making it the second fastest-growing advanced economy after the US.. It noted that growth had “remained solid in the United Kingdom, where spending proved resilient in the aftermath of the June 2016 referendum in favour of leaving the European Union [Brexit]”. The IMF said it was becoming more optimistic about the prospects for the global economy – expected to expand by 3.5% in 2017 and 3.6% in 2018 – but issued a renewed attack on the protectionist policies championed by Donald Trump and Marine Le Pen. “The global economy seems to be gaining momentum – we could be at a turning point,” said Maurice Obstfeld, the IMF’s economic counsellor. “But even as things look up, the post–world war two system of international economic relations is under severe strain despite the aggregate benefits it has delivered – and precisely because growth and the resulting economic adjustments have too often entailed unequal rewards and costs within countries.” The IMF penciled in 2017 growth of 1.1% for the UK in its previous outlook in October 2016 but subsequently revised up that forecast to 1.5% in January this year. Growth is expected to slow to 1.5% in 2018 – slightly weaker than the IMF’s previous prediction. “The 0.9 percentage point upward revision to the 2017 forecast and the 0.2 percentage point downward revision to the 2018 forecast reflect the stronger-than-expected performance of the UK economy since the June Brexit vote, which points to a more gradual materialisation than previously anticipated of the negative effects of the United Kingdom’s decision to leave the European Union,” the IMF said. The IMF was also more cautious about the longer-term impact on the economy from Brexit than it was in the run-up to last June’s referendum. “Though highly uncertain, medium-term growth prospects have also diminished in the aftermath of the Brexit vote because of the expected increase in barriers to trade and migration, as well as a potential downsizing of the financial services sector amid possible barriers to cross-border financial activity.” The IMF added that the challenge for the UK was to “successfully navigate the exit from the European Union and negotiate the new arrangements for economic relations with the European Union and other trading partners”. The adverse medium-term impact on growth would be lower if the two years of negotiations avoided putting up new economic barriers. The IMF said record low interest rates of 0.25% were appropriate given that growth was expected to slow and inflation was likely to peak at 2.5% this year. It signaled, however, that the end of the Bank of England’s ultra-low monetary policy was coming to an end, predicting a “less gradual normalisation” of interest rates than six months ago. Responding to the UK’s upgraded forecast, chancellor Philip Hammond said: “The fundamentals of our economy are strong and we continue to invest in the skills needed for a stronger and fairer Britain ... In Washington this week ‎I will be talking to our international partners about how we can carry on increasing global economic growth, with Britain again playing an active and engaged role in the global economy.” The IMF’s Obstfeld tempered his more upbeat assessment for the global economy with a warning that the recent improvement might not last. “Consistently good economic news since summer 2016 is starting to add up to a brightening global outlook,” he said. “At the same time, however, the upgrade to our 2017 forecast is modest, and longer-term potential growth rates remain subdued across the globe compared with past decades, especially in advanced economies. Moreover, while there is a chance growth will exceed expectations in the near term, significant downside risks continue to cloud the medium-term outlook, and indeed may have intensified since our last forecast.” The Fund listed six downside risks including: protectionism; faster than expected interest rate increases in the UK leading to financial market disruption; an aggressive rolling-back of financial regulation leading to excessive risk taking; and the vulnerability of China’s financial system after a period of rapid credit growth. Obstfeld said: “One salient threat is a turn toward protectionism, leading to trade warfare. Mainly in advanced economies, several factors – lower growth since the 2010–11 recovery from the global financial crisis, even slower growth of median incomes, and structural labour-market disruptions – have generated political support for zero-sum policy approaches that could undermine international trading relationships, along with multi-lateral cooperation more generally.” Avoiding a new trade war will be a central theme of this week’s spring meetings of the International Monetary Fund and the World Bank. Both organisations have been alarmed at the growth in protectionist pressures in the past few years. “Capitulating to those pressures would result in a self-inflicted wound, leading to higher prices for consumers and businesses, lower productivity, and therefore, lower overall real income for households,” Obstfeld said. Speaking at a press conference following the publication of the report, Obstfeld said the snap general election could create short-term uncertainty but the outlook could stabilise after polling day. Source: the guardian (18/04/2017)

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