IMF: UK economic growth to reach 2.9% in 2014

 

Olivier Blanchard from the IMF said it was clear that their forecasts had been "too pessimistic"

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The International Monetary Fund (IMF) says the UK economy will be the fastest-growing in the G7 this year.

It says the UK will grow 2.9% in 2014, up from a January estimate of 2.4%, and will see growth of 2.5% in 2015.

Overall, the IMF says the global economy strengthened at the end of 2013. It forecasts global growth of 3.6% this year and 3.9% in 2015.

But it sees risks in emerging markets and warns of low inflation in advanced economies and geopolitical issues.

Analysis

This is a relatively upbeat forecast for the world and for the UK in particular.

For the UK, it is yet another substantial upgrade to the IMF's assessment of the outlook. Only 12 months ago, the IMF forecast 1.5% growth for this year.

If the new figure of 2.9% turns out to be right, the UK will be the fastest-growing economy in the G7 major developed nations this year.

The global forecast also sees things getting better. Next year's figure would be just about the same as the average for the 10 years before the financial crisis.

Inevitably there are risks, however, including possible economic fallout from the political crisis in Ukraine.

The IMF also warns about the potential for excessively low inflation - yes, really.

Falling prices or deflation can be very damaging. So far, it is not affecting very many countries. But it is a potentially threatening cloud on the economic horizon.

The predictions come in the IMF's latest World Economic Outlook, its bi-annual analysis and projections of economic developments.

Global economy

The IMF said the US had seen stronger economic growth as Washington's debt and deficit cleared and predicted the country's economy would grow by 2.8% in 2014 and 3% next year.

But it scaled back its January growth forecast for emerging and developing nations, including India and Brazil, by 0.2 percentage points.

The IMF said the economies were hit as investors were more sensitive to policy weakness, with monetary policy being normalised in some advanced economies.

China's economic growth would be 7.5% for 2014 and 7.3% next year, it said, as it expected authorities in China to rein in their "rapid credit growth".

The IMF said India, South Korea and Indonesia should benefit from an improved export environment, but noted Thailand's prospects would be hit by political instability.

Russia's growth forecast was cut by 0.6 percentage points to 1.3% for the rest of 2014, because of "emerging market financial turbulence and geopolitical tensions relating to Ukraine... on the back of already weak activity", the IMF said.

Meanwhile, it said recovery of Europe's emerging economies would slow in 2014 and would also be hampered by any escalation of the situation in Ukraine.

Emerging Europe's forecast was revised down by 0.35 points to 2.4%.

Last week, the IMF's head warned that the global economy could be heading for years of "sub-par growth".

Christine Lagarde warned that without "brave action", the world could fall into a "low growth trap".

IMF economic growth forecast, in % per country for 2014 and 2015

  • China 7.5, 7.3
  • Russia 1.3, 2.3
  • India, 5.4, 6.4
  • UK 2.9, 2.5
  • US 2.8, 3.0
  • Euro area 1.2, 1.5
  • Emerging markets 4.9, 5.3

She said the global economy would grow by more than 3% this year and next, but that market volatility and tensions in Ukraine posed risks.

Ms Lagarde also urged more action to tackle low inflation in the eurozone.

Exports disappoint

The IMF says that growth has rebounded more strongly than anticipated in the UK on the back of easier credit conditions and increased confidence.

But it cautions that the recovery has been unbalanced, with business investment and exports still disappointing.

For instance, an external shock involving further growth disappointment in emerging market economies could spill over to the euro area, it says.

That, in turn, could spread to the UK through "financial linkages".

"In the United Kingdom, monetary policy should stay accommodative, and recent modifications by the Bank of England to the forward-guidance framework are therefore welcome," the report added.

"Similarly, the government's efforts to raise capital spending while staying within the medium-term fiscal envelope should help bolster recovery and long-term growth."

Danny Alexander said moving away from austerity measures would be "the worst thing possible to do"

In January, the IMF said it was increasing its UK growth forecast for 2014, from a previous 1.9%, to 2.4%. That figure has now been raised again.

Responding to the 2.9% growth prediction, Chancellor George Osborne hailed it as "proof that the economic plan is working" and criticised "growth deniers in the Labour Party" who he said were "intent on talking down the British economy".

For his part, shadow chancellor Ed Balls said the IMF was "right to warn about an unbalanced recovery" and accused the government of "complacently trying to claim that everything is going well".

On Tuesday, the National Institute of Economic and Social Research (NIESR) said that UK growth in the first part of 2014 had been "robust", and estimated that UK output grew by 0.9% in the three months ending in March.

Nevertheless, NIESR said that the UK economic recovery was "in its infancy" and that it did not expect the Bank of England to raise interest rates until the middle of 2015.

Food and drinks

Earlier on Tuesday, there was further indication of UK growth, with the release of manufacturing and industrial production figures.

UK manufacturing output grew by 1% in February from January, the Office for National Statistics (ONS) has said.

The rise - driven by pharmaceuticals, transport equipment, food, beverages and tobacco - was the biggest since September, and ahead of forecasts.

The year-on-year figure saw output 3.8% higher than in the same month of 2013.

Industrial output, which includes power generation and North Sea oil production as well as manufacturing, climbed 0.9% on the month.

 

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