IMF cuts forecast for UK economy

Posted on October 4, 2016

The face of Queen Elizabeth II is seen on rolled ten, twenty, and fifty pound sterling banknotes in this arranged photograph taken in London, U.K., on Thursday, March 6, 2014. The pound was 0.5 percent from the strongest level in four years against the dollar after the Bank of England announced it would keep interest rates at a record low this month. Photographer: Simon Dawson/Bloomberg©Bloomberg

The International Monetary Fund has cut its forecast for the UK economy next year for the second time since the Brexit vote.

Even if EU negotiations are settled to “avoid a large increase in economic barriers” and limit “political fallout”, the IMF predicts UK growth next year will be just 1.1 per cent. This is half the rate it had expected before the referendum and even lower than the forecast it published in July, which suggested growth would be 1.3 per cent next year.

    However, the fund revised up marginally its forecast for 2016 from 1.7 to 1.8 per cent. This comes after a run of economic data have suggested the UK has been more resilient than many had expected in the immediate aftermath of the Brexit vote.

    Figures published by the Office for National Statistics on Friday showed the services sector, which makes up four-fifths of the UK economy, grew 0.4 per cent in July. This was above market expectations of 0.1 per cent growth and faster than in the two months leading up to the referendum. Earlier on Tuesday, PMI survey data showed the construction sector expanded in September for the first time since May,

    The IMF’s further cut in its forecast for 2017 brings its expectations more in line with the average independent forecast of 0.9 per cent.

    The fund is supportive of the Bank of England’s actions since the Brexit vote, making no reference to market concerns that low interest rates and quantitative easing may be doing more harm than good. In August the BoE cut the interest rate and extended its asset purchase programme. The report praised the Bank’s actions for being “appropriately geared toward ensuring that lending conditions remain supportive” as the UK starts the process of withdrawing from the EU.

    Coming on the day after Philip Hammond made his inaugural speech as chancellor at the Conservative party conference, the IMF report provided minimal direction about the appropriate course for UK fiscal policy. The fund simply said the government should not seek to offset the automatic rise in borrowing that is likely to occur as the economy slows and suggested the “appropriateness of the medium-term deficit target” should be reassessed.

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    In his speech on Monday, the chancellor confirmed he would abandon his predecessor’s target to achieve a budget surplus by 2019-20. But he provided little detail on his new fiscal strategy, instead saying details would be provided in the Autumn Statement on November 23.

    Mr Hammond will join other world leaders in Washington later this week to discuss the challenges facing the world economy. Although global growth in 2016 is close to the forecast made at the beginning of the year, it remains disappointing relative to the pre-crisis period and implies much slower improvements in living standards in advanced and emerging economies than in the 1990s and 2000s.

    Many countries, including in the eurozone, are struggling to make economic reforms to boost growth. The IMF warns that widespread resentment of cross-border migration is making it harder to implement such changes.

    The discontent in Europe has been fuelled by economic anxiety, similar to that evident in the US. This has been exacerbated by the difficulties of absorbing large numbers of refugees from the Middle East. The IMF expects the eurozone to grow by 1.7 per cent this year and 1.5 per cent next year.

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