Hunt: IMF report shows a big upgrade to the UK’s growth forecast
Jeremy Hunt has announced that the International Monetary Fund had made a ‘big upgrade’ to the UK’s growth forecasts, following its annual healthcheck.
Hunt says:
“Today’s IMF report shows a big upgrade to the UK’s growth forecast and credits our action to restore stability and tame inflation.
“It praises our childcare reforms, the Windsor Framework and business investment incentives. If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy – but the job is not done yet.”
The Fund is due to release its assessment of the UK economy at 11.15am, when we’ll her from Hunt and IMF chief Kristalina Georgieva.
But the news is already out – with multiple reports that the IMF is no longer expecting the UK to fall into recession this year.
Instead of shrinking by 0.3%, as the IMF forecast in April, the UK economy is now forecast to grow by 0.4% during 2023.
The Fund said the improved outlook reflected the unexpected resilience of demand, helped in part by faster than usual pay growth, the fall in soaring energy costs, improved business confidence and the normalisation of global supply chains.
“Declining energy prices and widening economic slack are expected to substantially reduce inflation to around 5 percent y/y by end-2023, and below the 2 percent target by mid-2025,” the IMF said.
The IMF forecast economic growth of 1% in 2024 and 2% in 2025 and 2026 before settling back to a long-run rate of around 1.5%.
Key events
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.
Monetary policy should remain tight, IMF chief Kristalina Georgieva warns, as she outlines the Fund’s four priorities for the UK.
Bringing inflation to target means interest rates may stay higher for longer, she suggests, insisting the UK must ease the cost of living pressures on households.
The IMF also says:
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fiscal policy must stay aligned with monetary policy, to fight inflation and rebuild fiscal buffers.
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In the financial sector, the UK must maintain strong oversight of large and small banks. Georgieva also points to the shadow banking sector, saying the UK must not “lose sight of the non-banking financial sector”, where vulnerabilities could be exposed if financial conditions tightened.
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Fourthly, it’s important that the UK’s regulatory reforms protects financial stability. This is important for the world as a whole, Georgieva insists.
Georgieva: UK deserves credit for re-establishing financial stability
The IMF are keen to contrast the UK economic situation today with the chaos of last autumn, when then-chancellor Kwasi Kwarteng’s mini-budget rocked the markets.
The mini budget triggered a surge in UK borrowing costs, and almost caused the collapse of some pension funds before the Bank of England stepped in with a pledge ot buy UK debt.
IMF managing director Kristalina Georgieva says:
We would like to stress that a lot of credit is due to the re-establishing of financial stability in the UK after the pension funds stress episode last fall.
Georgieva says the UK authorities also acted decisively at the first sign of financial distress in the US, where several regional banks have failed.
In March, the UK arm of Silicon Valley Bank was sold to HSBC for £1 after a frantic weekend of negotiations.
Georgieva also confirms that the IMF welcomes the Windsor Agreement negotiated by Rishi Sunak earlier this year, as it resolves disputes around the Northern Ireland protocol.
The IMF believes inflation will fall to the Bank of England’s 2% target by mid-2025.
But there are significant risks to the outlook, managing director Kristalina Georgieva tells reporters in London.
She explains:
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The global economy remains highly uncertain, and a sudden tightening of global financial conditions could estrain credit and export demand, and depress GDP.
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High inflation could feed into price and wage-setting expectations, keeping inflation elevated for longer, and requiring tighter monetary policy to bring it down.
Georgieva says the Bank of England has shown “very responsible actions” by tightening monetary policy (that may please Andrew Bailey, as he is pummelled by unimpressed MPs on the Treasury committee this morning).
Georgieva also nods to Jeremy Hunt, saying his budgets are “aligning fiscal policy with the objective of monetary policy to fight inflation and stabilise debt over time”.
IMF’s Georgieva: UK authorities have taken decisive and responsible steps
IMF managing director Kristalina Georgieva then says it is great to be in London on a sunny day, and kicks off by congratulating the UK on this month’s coronation.
Georgieva hopes that King Charles and Queen Camilla’s reign will be “a time of prosperity for this great country”.
Georgieva then outlines the conclusions of today’s healthcheck on the UK (called an ‘Article IV’ in IMF jargon).
She says:
The UK authorities have taken decisive and responsible steps in recent months. This has promoted macroeconomic and financial stability during a time of heightened market volatility.
Their efforts, and the recent decline in energy prices, are beginning to have a favourable impact on the economy.
Georgieva then confirms that the IMF now anticipate positive GDP growth in the UK this year of 0.4%, up from the 0.3% fall expected last month.
Despite the positive news (no recession), Jeremy Hunt adds that high inflation and energy prices remain key challenges for the UK.
The chancellor says he’s also pleased that the IMF believes business investment will benefit from the Windsor Framework (the new deal on Northern Ireland’s trading arrangements).
Jeremmy Hunt then says the government was pleased to see that the IMF agrees the UK needs “ambitious, evidence-based structural reforms” to suppport growth.
He cites the expansion of free childcare for one- and two-year-olds announced in the spring budget, and the ‘full expensing’ tax break to let firms write off costs of IT equipment and machinery against tax on profits
Hunt says:
Today, the IMF says these supply side measures should have a positive effect on medium-term growth, and we will continue this work.
Hunt: IMF’s assessment shows we are on the right track.
Chancellor Jeremy Hunt and IMF managing director Kristalina Georgieva are holding a press conference now to discuss the state of the UK econony.
Hunt says the IMF has provided a “timely independent assessment of the UK economy”, and has visited when the economic backdrop is one of “challenge and opportunity.”
Since the IMF’s last assessment in February 2022, our world and the economy had been “challenged fundamentally” by Vladimir Putin’s illegal war in Ukraine, Hunt says.
Hunt says his central mission as chancellor has been to “restore macro-economic stablity”, and to deliver the government’s priorities of halving inflation, growing the economy and getting debt falling.
Hunt declares, after the IMF dropped its forecast of a recession this year, that:
Today the IMF’s assessment shows we are on the right track.
Hunt says the IMF’s new prediction of 0.4% UK growth this year (up from a 0.3% contraction predicted earlier) is higher than the Bank of England’s latest forecasts (for 0.2% growth in 2023).
The IMF also say we have acted decisively to fight inflation, Hunt adds, which will substantially “reduce to around 5% by the end of the year”.
Plus, the Fund agrees that the government’s fiscal policy will help to reduce the deficit.
Hunt says:
Togther these forecasts demonstrate we are on the right path, but the job is not done yet.
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 grpwth, and the drop in energy costs.
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.
Silvana Tenreyro, an independent member of the Bank of England’s Monetary Policy Committee, then explains to MPs that the BoE would have had to raise interest rates months before the Ukraine war, to protect the economy from the inflation shock.
She outlines a scenario in which the Bank could have raised interest rates to 8% in July 2021 (when they were a record low of 0.1%), even though inflation was then on target at 2%.
Had this happened, UK unemployment would have been three percentage points higher she explains, but it would have only had a relatively small impact on inflation.
The models show that inflation would have peaked at 9%, not 11%, and also led to a “massive undershoot” in inflation in future, professor Tenreyro explains.
John Baron MP doesn’t accept that the UK’s inflation surge can simply be blamed on ‘black swan events’ such as the Ukraine war.
In February, the month of Russia’s invasion, inflation hit 6.2% and Bank Rate was only 0.5%, Baron points out, as evidence that the BoE was moving too slowly.
Andrew Bailey says that the inflation from global supply chain shocks did prove to be transient, as central bankers had expected. The problem was that the Ukraine war drove up food and energy costs.
Bailey also reminds MPs on the Treasury Committee that the BoE expected the labour market to weaken at the end of 2021 when the furlough scheme, pushing up unemployment and easing inflationary pressure.
Bailey says:
We hold our hand up and say that’s a judgement we had to make, and it didn’t turn out right.
But almost every other forecaster took the same view, he insists.
