Makes a change: IMF marks Brics down and UK up

It's worth savouring the novelty. Today the IMF raised its UK growth forecast for this year, and cut it for most emerging market economies, including China. I can't remember the last time we saw those two things together in an IMF report, but it's safe to say it's been a pretty long time.

In fact, the only part of today's update which sticks to the previous script is the forecast for the eurozone, which has been cut for the umpteenth time.

The Fund thinks that "delays in policy implementation" are helping to prolong the recession on large parts of the Continent. Well, there's a shock.

I'll say more about the emerging market forecasts in a second: they're the most significant feature of this latest report. But first, a few words about the UK.

Treasury folks will be smiling at the increase in the Fund's 2013 forecast, only a few weeks after the IMF suggested he should ease up on austerity this year to protect the recovery.

The Fund quietly repeats that advice, in this report, with a reference to "more gradual near-term fiscal adjustment" in key advanced economies. But Mr Osborne's advisers will surely be telling him to go easy on the "I told you so's".

After all, the Fund has been cutting its UK forecasts more or less continuously since 2010. This latest, modest, upgrade to growth in 2013, from 0.7% growth in April to 0.9% now, does not even cancel out the previous cut.

As recently as last October, the Fund was expecting the UK to grow by 1.1% this year. It's worth noting, too, that the Fund has not raised its expectations for 2014, when they are still expecting only modest growth of 1.5%.

The NIESR also has good news for the chancellor today: on the basis of its monthly GDP estimate, it now thinks growth in the second quarter will be twice as fast as in the first three months of the year: 0.6%. But we also found out there had been a sharp fall in manufacturing production in May - for the second month in a row. So the euphoria remains firmly on hold.

But back now to the global picture - and those emerging market economies that have been breathing a different kind of economic air to the likes of us for so much of this post-crisis period. The IMF's message is that there has been a change in the economic weather for them too.

Needless to say, the new forecasts will be wrong. they nearly always are. The precise numbers don't matter - but the size of the downward revisions are significant - and so is the underlying cause.

The Fund still thinks the likes of China and Brazil will grow more than twice as fast as the advanced economies over the next year or two, with growth of around 5%. But with so much room for "catch-up", it would be a surprise if they were not growing a lot faster than the "old" world.

The average cut for developing and emerging economies is only about a third of a percentage point, in 2013 and 2014, but the numbers are much chunkier for some. For example, the Fund has taken nearly a percentage point off the Russian and South African growth forecast for 2013 and cut the Brazilian forecast for 2014 by a similar amount.

The forecast for China had already been revised down, but this update takes another two-thirds of a percentage point from growth in 2014.

The reason for the change of heart is the same as we have all been banging on about for weeks: that increase in global interest rates over the past few months, in response to the US central bank's talk of tighter policy.

We saw last week both the British and European central banks respond to that change in the global financial weather with an outbreak of policy "guidance". Alas, the choice for emerging market economies is much harder, for all the reasons I've discussed in the past.

As the Fund puts it: "Many emerging market and developing economies now face a trade off between macroeconomic policies to support weak activity and those to contain capital outflows." In other words, to keep global investors in, these countries need to raise interest rates, but to save growth, they want rates to come down.

That is a very old choice for any country that is dependent on foreign cash. But it's no easier today than it was 20-30 years ago, when some of these countries were just starting to "emerge".

In fact, many would say the pressure on emerging market economies was greater, now that their populations have had a better taste of what happens when the economy enjoys rapid growth.

The Fund's new forecasts assume that some of the recent rise in long-term global interest rates will reverse itself, and the volatility in emerging financial markets will subside.

Brazil and others will be hoping that's right. As the Fund itself notes, it is quite possible that it is not - in which case, we can expect more downward revisions to growth in these "fast-growing" emerging markets.