The IMF on the UK & Advanced Economies
The IMF, as was widely trailed (first I believe by Sky’s Ed Conway) has upgraded its UK growth forecasts for 2014 and 2015.
It now expects growth of 2.4% this year and 2.2% next – exactly in line with the current OBR projections but a tad below independent forecasters where the average of new forecasts for 2014 is 2.7%.
The UK received the largest upgrades of any major economy, which is obviously good news but the IMF seems to be expressing some quiet reservations about the nature of UK growth.
As the report notes:
Elsewhere in Europe, activity in the United Kingdom has been buoyed by easier credit conditions and increased confidence. Growth is expected to average 2¼ percent in 2014–15, but economic slack will remain high.
In just 34 words the IMF has made a couple of important points about the UK recovery. First, that is associated with easier credit and increased confidence – essentially a rise in household debt/a decrease in household savings (today’s Bank of England continue to show decline lending to firms). Second, that there remains a good deal of economic slack – i.e. there is the potential for policy to be more supportive and still some way to go before we have a full recovery.
Last Spring the Fund was warning the UK that it might have to ease fiscal policy and that growth would remain weak. The Fund now appears to be saying that it did not foresee the impact of easier credit and increased consumer confidence. In effect it is not conceding that it got anything wrong on fiscal policy – just that the change in consumer behaviour was an unexpected driver of growth.
On a global level the Fund is more pessimistic. Whilst the title of the latest World Economic Outlook – ‘Is the Tide Rising?’- sounds vaguely optimistic, the overall tone is not especially reassuring.
The Fund believes that deflation risk is rising in the Eurozone specifically and across developed economies generally:
risks to activity associated with very low inflation in advanced economies, especially the euro area, have come to the fore. With inflation likely to remain below target for some time, longer-term inflation expectations might drift down. This raises the risks of lower-than-expected inflation, which increases real debt burdens, and of premature real interest rate increases, as monetary policy is constrained in lowering nominal interest rates. It also raises the likelihood of deflation in the event of adverse shocks to activity.
It goes on to argue that:
With prospects improving, however, it will be critical to avoid a premature withdrawal of monetary policy accommodation, including in the United States, as output gaps are still large while inflation is low and fiscal consolidation continues.
In short the Fund thinks that whilst growth has picked up, the risk is now that inflation is too low and that monetary policy should remain supportive to avoid the risk of deflation (falling prices).
This last point may seem a million miles away from the economic current debate in the UK but with CPI now back on target and possibly due to fall further in the coming months, I wouldn’t be at all surprised if late 2014 saw a lot of discussion about the risk of ‘too low inflation’ in the UK.
Whether lower inflation will feed through into an ease in the living standards will dependent entirely on the behaviour of wages.