IMF predicts UK economic bounce-back this year to match resurgent US
Britain’s economy will grow faster than any major economy in Europe as it rebounds from the COVID-19 recession and emerges from lockdown, the International Monetary Fund (IMF) has predicted.
In the latest update to its World Economic Outlook – its periodical look at the state of the global economy – the IMF forecast that the UK economy would grow by 7% this year, the strongest year for economic growth since comparable records began following the Second World War.
The UK’s forecast growth rate would represent the joint-strongest rate in the group of seven leading industrialised nations alongside the US, which is also expected to expand by 7%.
IMF chief economist Gita Gopinath said it estimated the pandemic had reduced per capita incomes in advanced economies by 2.8%
The UK growth rate this year is stronger than Germany (3.6%), France (5.8%) and Italy (4.9%), though the UK economy contracted more than those other countries in 2020.
The IMF’s updated forecasts also anticipate the UK growing by 4.8% next year, implying that the UK economy will regain its pre-COVID levels around the turn of the year.
However, while the UK is expected to rebound quickly, it is not expected to regain all the lost potential growth sacrificed during the pandemic – something which is not true of the US, which the IMF expects to be stronger, on a GDP basis, following the pandemic than was anticipated before it struck.
The IMF said that the main fault line in the global economy in the coming years would be between those countries with high vaccination rates and those mostly emerging economies with lower levels of immunisations.
Its chief economist, Gita Gopinath, said: “We estimate the pandemic has reduced per capita incomes in advanced economies by 2.8%, relative to pre-pandemic trends over 2020-2022, compared with an annual per capita loss of 6.3% a year for emerging market and developing economies (excluding China).”
Considering the likely impact of the Delta variant of COVID, the IMF said: “In countries with high vaccination coverage, such as the United Kingdom and Canada, the impact would be mild; meanwhile countries lagging in vaccination, such as India and Indonesia, would suffer the most among G20 economies.”
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CBI: Long-term outlook for UK economy ‘still very positive’
In spite of growing disquiet about rising prices of goods and services around much of the developed world, the Fund said it expected high inflation levels to abate in the coming years, saying that many of the price rises reflected temporary factors.
However, it added that this was “subject to significant uncertainty given the uncharted nature of this recovery”.
“More persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation,” the IMF said.
“Further, inflation is expected to remain elevated into 2022 in some emerging market and developing economies, related in part to continued food price pressures and currency depreciations – creating yet another divide.”
Chancellor Rishi Sunak said of the Fund’s findings: “There are positive signs that our economy is rebounding faster than initially expected, with the IMF forecasting the UK to have the joint highest growth rate in 2021 among the G7 economies.
“That said, we still face challenges ahead as a result of the impact of the pandemic, which is why we remain focused on protecting and creating as many jobs as possible through our Plan for Jobs.”
The Federal Reserve has defied calls from US President Donald Trump for a cut to the interest rate by leaving it unchanged.
The decision means it has an effective rate of 4.3%, where it has remained after the central bank, known as the Fed, reduced it three times last year.
“We’re keeping the rates high, and it’s hurting people from buying houses,” Mr Trump told reporters. “All because of the Fed.”
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Mr Trump has repeatedly been asked whether he would fire Fed chair Jerome Powell if he failed to heed his demand to cut the rate.
In June, the US president labelled Mr Powell a “stupid person” after the Fed decided not to change rates. Then less than two weeks later, in a further attack, he said the Fed’s chair should “ashamed” and would “love” him to resign.
The US president has spent months verbally attacking Mr Powell.
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Fed chair has ‘done a bad job’, says Trump
There were clear tensions between the pair last Thursday as they toured the Federal Reserve in Washington DC, which is undergoing renovations.
When taking questions, Mr Trump said: “I’d love him to lower interest rates,” then laughed and slapped Powell’s arm.
There were clear tensions between the US President and Mr Powell during last week’s visit to the Federal Reserve. Pic: Reuters
The US president also challenged him, in front of reporters, about an alleged overspend on the renovations and produced paperwork to prove his point. Mr Powell shook his head as Trump made the claim.
When Mr Trump was asked what he would do as a real estate mogul if this happened to one of his projects, he said he’d fire his project manager – seemingly in reference to Mr Powell.
Donald Trump challenged Mr Powell in front of reporters. Pic: Reuters
Unlike the UK, the US interest rate is a range to guide lenders rather than a single percentage.
The Fed has expressed concern about the impact of Mr Trump’s signature economic policy of implementing new tariffs, taxes on imports to the US.
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Trump’s tariffs: What you need to know
On Wednesday, the president said he was still negotiating with India on trade after announcing the US will impose a 25% tariff on goods imported from the country from Friday.
Mr Trump also signed an executive order on Wednesday implementing an additional 40% tariff on Brazil, bringing the total tariff amount to 50%, excluding certain products, including oil and precious metals.
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The committee which sets rates voted 9 to 2 to keep the benchmark rate steady, the two dissenters were appointees of President Trump who believe monetary policy is too tight.
In a policy statement to explain their decision, the Federal Reserve said that “uncertainty about the economic outlook remains elevated” but growth “moderated in the first half of the year,” possibly bolstering the case to lower rates at a future meeting.
Nathan Thooft, chief investment officer at Manulife Investment Management, described the rate decision as a “kind of a nothing burger” and it was “widely expected”.
Tony Welch, chief investment officer at SignatureFD, agreed that it was “broadly as expected”. He added: “That explains why you’re not seeing a lot of movement in the market right now because there’s nothing that’s surprising.”
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