IMF no longer expects UK recession this year
It’s official: The International Monetary Fund no longer expects Britain’s economy will fall into a recession this year.
After its annual healthcheck on the UK, the IMF has upgraded its forecasts. It now expects UK GDP will rise by 0.4% this year, rather than shrink by 0.3% as it had expected back in April.
Today the IMF cites the UK’s unexpectedly resilience of demand, helped by faster than usual pay growth, the drop in energy costs, and the Windsor Framework (the revised version of the Northern Ireland protocol).
The recovery in global supply chains, helped by China’s reopening from pandemic restrictions, has also helped.
But, the IMF also warns that UK inflation remains subbornly high, due to the Ukraine war, and that monetary policy (set by the Bank of England) should remain tight to keep inflation expectations well-anchored.
Key events
IMF lifts UK growth forecast: What the analysts say
Here’s some reaction to the International Monetary Fund’s u-turn on the UK’s economic prspects this year.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, says Britain has defied gloomy predictions for a long recession with the International Monetary Fund now joining the chorus of revisions.
Streeter
The surprising resilience of companies and consumers have helped buck the forecasts made amid the stormy financial weather prompted by the Truss/Kwarteng mini-Budget.
In the Autumn interest rates were forecast to shoot up to above 6% and an energy crisis in Europe was still widely feared. But as gas prices have retreated, the UK government has repaired its financial credibility, and consumers have shown hardiness amid rising prices, prospects for the UK are now brighter.
ING developed market economist James Smith warns that the UK won’t see strong growth this year:
“The UK economy is beginning to reap the benefits of the dramatic fall in natural gas prices since last summer, which are back to levels last seen before the war in Ukraine began last year. The squeeze on disposable incomes is set to become less acute over coming months with energy bills set to fall from July, and food price inflation likely at or close to a peak. That suggests the worst is behind us for consumer spending, and indeed confidence has risen noticeably over recent months. The jobs market is also proving remarkably resilient despite the various headwinds of the past year, and firms are still battling worker shortages – albeit less severe than they were a year ago.
“We agree with the IMF that all of this means the economy should continue to dodge a recession over the next few months, though we shouldn’t expect strong economic growth either. A growing number of UK households will refinance their mortgages over coming quarters, while higher interest rates are a constraint on investment.
The UK also isn’t totally immune from the recent banking stresses in the US, which we think is likely to tip the American economy into recession later this year and will inevitably have some spill over to the global economic outlook.”
Ben Laidler, global markets strategist at social investment network eToro, points out that this morning’s PMI report suggested growth weakening this month (see earlier post):
“The IMF has eaten humble pie, today reversing its overly bearish recession forecasts for the UK economy.
This follows the lead from the Bank of England which recently raised its forecasts and the improved outlook has already seen the FTSE 100 rally 5% this year and made Sterling the best performing major currency against the dollar. Markets are now more focused on the weakening of this less-bad economic outlook, with today’s forward looking flash PMI falling back to 53.9 and masking a recessionary manufacturing sector.
All eyes are on tomorrow’s UK inflation report, with hopes that we see a fall below the 10% inflation rate that is the worst of any major economy.
Camelot: Returns to good causes from UK lottery sales hits all-time high, in final year
Rob Davies
Camelot has operated the National Lottery since its inception in 1994, when 22m people watched the first ever draw.
Today, the company – owned by a Canadian pension fund – presented its last ever set of full-year results, my colleague Rob Davies reports.
Its licence to operate the National Lottery was finally wrested away by Czech billionaire-owned Allwyn UK after a hard-fought battle that ended up in the courts. Camelot will essentially cease to exist once the licence transfers over in February 2024.
With this valedictory set of results, the company has done its best to show the Gambling Commission, which held the decision over the award of the next ten-year licence, that it could live to regret its choices.
Total National Lottery sales for the year to the end of March 2023 increased by £99.6m to £8.2bn, the second highest in the history of the draw. Returns to good causes from ticket sales hit an all-time high of £1.8bn.
Over to you, Allwyn….
Jeremy Hunt then wrapped up the IMF press conference by welcoming the Fund’s assessment of the UK economy.
Hunt thanks the Fund’s staff (and no wonder, given the gushing support for his policies from today’s Article IV report and from Kristalina Georgieva):
What we’ve heard is a decisive vote of confidence in UK economic management.
But we’ve also hear the warnings about global instability and risk.
We will stick to our plan to get inflation down, and lift growth, Hunt pledged.
Georgieva: GDP is not a perfect measure
And the final question for IMF managing director Kristalina Georgieva:
Q: Do you expect to still talk about GDP in five year’s time, given the criticism of it as a measure?
Georgieva says that GDP is a good indicator, but not perfect “by a long mile”.
She gives the example of hiring a gardener. Paying the gardener lifts GDP.
But should romance break out, those payments might cease.
Georgieva explains:
If I decide to marry the gardener, that would reduce GDP.
Investing in activities that increase pollution and degrade the environment also expands GDP, Georgieva points out.
She says:
We have to work hard on helping policymakers to have a better set of indicators to make decisions on.
Better indicators of vulnerability to climate shocks, for example, would help.
But GDP is helpful, so Georgieva doesn’t want it thrown out like a baby with the bathwater. “Better food” would help it grow.
IMF: Tax cuts neither affordable nor desirable today
Q: What’s your message to those who want tax cuts? Are they a route to growth, my colleague Phillip Inman asks.
Kristalina Georgieva repeats her concerns that inflation is a tax, which falls heaviest on the poor.
So the government is right to prioritise the fight against inflation, she says.
Georgieva then adds that once that fight has been won, the UK will need investment to grow faster and in a more sustainable way. That puts pressure to increase spending, which needs to be funded.
The IMF has come up with a list of measures to increase revenues, which she encourages Hunt to scrutinise [Georgieva flagged carbon taxes as one option earlier].
Georgieva adds that, of course, it is attractive to look into ways to lighten the tax burden to inject more investment opportunity into the UK.
But only when it is affordable.
She says firmly that cutting taxes now would not help fight inflation, saying:
At this point of time, it is neither affordable nor desirable because if you want to contrain demand and increase supply, you have to think what are the right policy measures.
UK likely to outperform Germany this year
Q: With your new forecast for 0.4% growth this year, how does the UK compare with G7 and G20 countries?
It compares favourably, IMF MD Kristalina Georgieva smiles.
We are likely to see the UK performing better than Germany, for example.
Georgieva adds that a single year isn’t the best way to judge a country.
Over the last three years, the UK’s performance has been quite good compared to the rest of the G7, perhaps taking third place in the G7 growth league table.
Q: What impact would pre-election tax cuts have on the Bank of England?
Kristalina Georgieva tries to swerve this one, saying there are no plans for such tax cuts at present.
But she says the alignment between fiscal and monetary policy, to bring down inflation, must remain in place for some time [which would indicate little opportunity for a responsible pre-election splurge].
Q: What’s the IMF’s recommendation for fiscal policy in the run-up to the next election?
Jeremy Hunt offers to leave the room (!).
The backdrop to the question, of course, is whether the government should engage in some pre-election tax cuts as backbench MPs have been demanding.
IMF chief Kristalina Georgieva , though, thinks the current position is sensible.
The government has been very prudent in prioritising not what has been politically easy, but what is right for the British people.
Georgieva adds that the IMF is very encouraged by the current fiscal priorities – fighting inflation, improving growth grospects, and taking decisions that are “benefitting people across the United Kingdom”.
And in quite the endorsement, she says the UK has shown a determination that has been “above the political fray.”
Q: Are you worried that inflation looks sticky in the UK and around the world – will it mean interest rates must keep rising?
IMF MD Kristalina Georgieva says that headline inflation seems to have peaked, and is now receding, due to “strong, coordinated” action by central banks.
But core inflation [stripping out energy costs] is stickier.
Georgieva says food inflation is proving hard to bring down, in the UK and elsewhere.
This may mean interest rates must remain high for longer, so that financial conditions are kept tight.
She repeats that the IMF expects UK inflation will hit the 2% target in mid-2025.
Q: What are the consequences if the US doesn’t agree to lift the debt ceiling in time? A US recession, or a global one?
We have seen historically that discussions about the US debt ceiling have been quite tense, but always resulted in a solution being found, Kristalina Georgieva replies.
That’s because it is clear that failing to lift the debt ceiling would be detrimental to the US, and global economy.
Georgieva says:
I look forward to a solution being found this time around
She adds that if a solution isn’t found, there would be non-desirable implications for the world economy.
[reminder: the US could default in June if Congress doesn’t agree to lift the current limit on America’s debt, with Republicans demanding spending cuts in return].
Georgieva hopes we won’t have to wait until the 11th hour for a deal.
Q: How important are your forecasts if the IMF keeps getting it wrong? Why should we pay attention to your forecasts this time?
Kristalina Georgieva says the IMF is slightly less pessimistic than other forecasters, and also than the Bank of England.
We have gone through a very turbulent time over recent years, Georgieva insists (a point which the BoE has made to MPs this morning).
We have experienced shock upon shock upon shock. That has created exceptional uncertainty.
Georgieva says the Fund’s staff deserve credit for being agile, and for adjusting their forecasts swiftly as conditions change — at a time which is “the foggiest” it has been in many decades.
Q: When will UK living standards rise again in the UK?
Kristalina Georgieva doesn’t commit to a date.
Instead, she says the moderate growth now expected in the UK will help support living standards, and repeats the IMF is “very encouraged” by the government’s focus on structural reforms to boost growth.
In 2025, 2026, 2027 “we see these improvements paying back to the British people”, Georgieva adds.
Q: Should tax cuts be a priority for the UK?
Kristalina Georgieva suggests it should not. She says the government is right to prioritise the fight against inflation, calling it a tax on the British people.
The best thing the government can do for incomes is to bring inflation down, she says.
In the medium-term, the IMF recommends closing down some UK tax loopholes, and making the evaluation of real estate more accurate.
It also wants to see more aggressive action on carbon tax, to encourage investment towards the green transition.
IMF denies being too gloomy about UK
Onto questions for the IMF, after their assessment of the UK economy.
Q: The IMF has been consistently accused of being too gloomy about the UK’s prospects and resilience, especially after Brexit. Do today’s upgraded forecasts vindicate that, and have you asked the question why the IMF gets it so wrong?
International Monetary Fund Kristalina Georgieva says there are three reasons for the upgrade to the UK’s GDP forecasts.
1) The previous forecasts were made in the midst of financial stress in the US, and Switzerland (where Credit Suisse has been taken over by UBS). So the Fund hadn’t seen the benefits of the decisive action taken in the UK.
2) The UK now has more predictable relations with the EU following the Windsor Agreement, which is boosting confidence.
3) Energy prices have receded.
Georgieva insists that the increase in the projections are basically due to confidence measures taken by the authorities, and some improvement in global conditions.
To sum it up, Kristalina Georgieva gestures to the window (where a rarely-spotted shiny object has appeared in the sky).
The IMF managing director explains:
Like the weather outside, the outlook for the UK economy has improved, but in a context of a highly uncertain global environment, structural challenges and still very high inflation.
UK authorities have demonstrated their ability to overcome hurdles in difficult times, and we look forward to continuing our constructive collaboration for strong and inclusive growth in the United Kingdom.
Georgieva ended her statement in London with a brisk endorsement of the UK’s economic policies.
It shows how relations have improved since last autumn, when Kwasi Kwarteng had to race back from the IMF’s meeting in October, to be sacked after his mini-budget spooked the markets.
Georgieva says the IMF has a positive view of the government’s emphasis on structural reforms to sustainably boost the UK’s growth potential.
IMF managing director Georgieva says:
We strongly endorse the measures already taken. The increase in childcare support, and the introduction of capital investment allowance in the spring budget.
Georgieva also hails Jeremy Hunt’s “four e” strategy of enterprise, education, employment, and everywhere.
We see that as a concept that practially would make a difference for the competitiveness and the growth potential of the UK.
Targeting key growth areas such as advanced manufacturing, life sciences and clean energy, this is all “on the right track”, Georgieva says.
Looking ahead, the IMF wants to see more evidence-based reforms.