UK economic forecast boosted by IMF
The International Monetary Fund (IMF) has upgraded its projection for UK growth this year by 0.4% to 1.1% – the largest upward revision for any advanced economy.
In a boost to Chancellor Rachel Reeves as she prepares to travel to Washington for the IMF’s annual meeting this week, its latest world economic outlook predicts strengthening growth as “falling inflation and interest rates” stimulate demand.
The IMF’s improved view of UK performance is a significant increase on its July projection of 0.7% growth this year, and up by 0.6% from its April assessment.
Its projection of 1.5% of GDP growth in 2025 remains unchanged.
Responding to the announcement Ms Reeves, said: “It’s welcome that the IMF has upgraded our growth forecast for this year, but I know there is more work to do. That is why the budget next week will be about fixing the foundations to deliver change, so we can protect working people, fix the NHS and rebuild Britain.”
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The US economy meanwhile is projected to have grown by 2.5% this year, an increase of 0.2% on the July projection, before falling back to 2.2% in 2025.
By contrast, the Euro area is projected to grow by just 0.8% this year, down 0.1%, rising to 1.1% next year, a downgrade of 0.3%.
The IMF’s more optimistic view of the UK economy comes after official figures in the last fortnight showed a return to growth in August following two months of stagnation, and a dip in inflation below the Bank of England‘s target of 2% last month for the first time in three-and-a-half years.
Ms Reeves’s visit to Washington comes a week before she delivers her first budget, a crucial moment for her stewardship of the economy and the new Labour government.
A critical time for the chancellor
The chancellor is understood to be aiming to generate around £40bn in tax rises and spending cuts in order to deliver some targeted public spending increases and build some headroom into forecasts for the coming years.
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She is also expected to change the calculation of government debt to allow her to increase borrowing for investment in infrastructure projects.
Many of the issues with which she is grappling domestically are mirrored in those identified by the IMF in its latest assessment of the global economy.
Global problems
The report’s authors conclude that the “global battle against inflation has largely been won”, with average global rates due to settle at 3.5% next year, lower than the average between 2000 and 2019.
Having proved “unusually resilient” in avoiding recession as inflation fell from its near double-digit peak, they say the global economy now faces the challenge of improving growth prospects while simultaneously stabilising debt levels and “rebuilding much-needed fiscal buffers”.
The IMF identifies a range of challenges including regional conflicts including those in the Middle East and Ukraine; the need to loosen monetary restraint while tightening fiscal policy; a potential slowdown in China; and the associated risk of protectionism and trade wars, with the threat of tariffs imposed by the US and Europe on Chinese goods.
Warning to ‘stabilise debt’
In a warning that may be noted in the Treasury and No 11, the IMF says that after years of elevated borrowing in response to the pandemic and post-COVID economic adjustment, governments need to stabilise debt and “rebuild much-needed fiscal buffers”.
This has to be done gradually and credibly to retain the confidence of markets and enable states to continue to borrow at affordable rates.
Donald Trump’s victory was secured on an unequivocal promise to stretched American households that he would “end inflation”, but markets and economists are anticipating his second term will do the opposite.
A combination of corporate tax cuts, government borrowing, lower migration and swingeing tariffs on overseas imports are all expected to heat up the American economy and stoke price rises.
Bond yields on 10-year US Treasuries, effectively the price of borrowing for the American government, were up by 3.6% overnight, rising more than 15 basis points to above 4.4% as European markets opened.
That signals investors believe that borrowing will rise, and the Federal Reserve will be forced to slow rate cuts in order to tackle inflation.
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A clearer picture will emerge on Thursday when Federal Reserve chairman Jay Powell, who Mr Trump said will not be reappointed, announces the next move on rates.
Markets still expected a 0.25 percentage point cut (a similar move to that anticipated from the Bank of England earlier in the day) but Mr Powell’s comments will be scrutinised for signals of what Trump 2.0 means for the prospect of further cuts.
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But higher prices for consumers are not necessarily bad news for corporate America, with the dollar surging against sterling and the euro as swing states fell to Mr Trump, and Wall Street futures trading indicating a rally when they reopen with him confirmed as president-elect.
Shares in US banks were boosted with J.P. Morgan, Goldman Sachs and Morgan Stanley all up more than 6% in pre-market trading, along with Tesla, boosted by more than 13% as markets anticipate a dividend for Elon Musk’s campaign-trail support.
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Defence stocks were higher too and not just in the US – BAE Systems and Rolls Royce were both up – reflecting likely pressure on America’s NATO allies to make good on their commitments to increase spending.
Bitcoin was also positive in anticipation of a more benign regulatory environment from a president who used the campaign platform to launch his own cryptocurrency.
By contrast renewable holdings, the target of much of Joe Biden’s economic stimulus, were in negative territory, with wind and solar priorities likely to be replaced by a pledge to “drill baby, drill”.
Of most concern to America’s trading partners and allies will be Mr Trump’s promise to erect barriers to free trade.
The man who said tariffs “is the most beautiful word in the world” has pledged a 60% levy on Chinese imports and 10% on those from elsewhere, a deeply protectionist move that could trigger a trade war with China and the EU.
These can only increase prices in the US, with importers paying the levies at the point of entry, and other trading blocs likely to respond in kind.
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The EU has already imposed its own 35% tariff on Chinese EVs to the dismay of the continent’s carmakers the measure is intended to protect.
While these tensions play out, post-Brexit Britain, a relatively small player outside the major trading blocs, is likely to be a spectator.
Post Office campaigner Sir Alan Bates is yet to receive a reply from Sir Keir Starmer, despite writing to him over a month ago.
Sir Alan said he had written to the prime minister to remind him the “clock is still ticking” on a financial redress deadline for victims.
In his letter, he demanded a March 2025 deadline for compensation for sub-postmaster victims of the Horizon scandal.
Sir Alan confirmed to Sky News he was yet to hear back from the prime minister.
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“It was over a month ago,” he said.
“I sent him a reminder yesterday. I told him the clock is still ticking and it’s now five months from the March deadline, which I’m told is still achievable by other professionals.
“So let’s get on with it, that’s all we want. Get on with it.”
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