International Monetary Fund upgrades UK economic growth forecast but keeps global growth prediction largely unchanged
The global economic recovery will pick up pace this year but remains “weak and uneven”, the International Monetary Fund’s top economist has said.
Olivier Blanchard said the “largely anticipated” recovery in global growth would see it pick up to 3.7% in 2014 from 3% last year but there was still much work to be done as new risks emerged.
In a boost to George Osborne, Blanchard confirmed the IMF had raised its UK growth forecast to 2.4% for this year, from a previous forecast of 1.9%. It was Blanchard, who last year warned Osborne has was playing with fire with his austerity drive, but the forecast for the UK is well ahead of Europe’s largest economy, Germany, where growth is forecast at 1.6%. France’s economy would grow by a much weaker 0.9% given “policy uncertainty is weighing on growth”, Blanchard said.
The forecast for global growth was barely changed from 3.6% pencilled in last October when the IMF published its closely watched World Economic Outlook (WEO).
“The brakes to the recovery are progressively being loosened. The drag from fiscal consolidation is diminishing. The financial system is slowly healing. Uncertainty is decreasing,” said Blanchard, unveiling the fund’s latest update to the WEO forecasts.
The Washington-based fund also stuck by its view that growth in advanced economies would accelerate markedly this year, to 2.2% from 1.3% in 2013. Growth in emerging market and developing economies will edge up to 5.1% from 4.7% in 2013, Blanchard said.
He highlighted risks from deflation in the eurozone and the unwinding of years of ultra-loose monetary policy and stressed the recovery was fragile and by no means equally spread.
“Among advanced economies, it is stronger in the US than in Europe, stronger in the euro core than in Southern Europe. In most advanced economies, unemployment remains much too high. And downside risks remain,” Blanchard said.
Blanchard welcomed a slowdown in the UK austerity process: “Conditions are increasingly favourable in the UK and the euro core. Public debts are on sustainable paths, and fiscal consolidation is, rightly, slowing down. Credit conditions are favourable,” Blanchard said.
The Treasury welcomed the UK upgrade, which was the largest for any of the the advanced G7 countries. “Today’s report provides further evidence that the government’s long term economic plan is working,” a spokesman said.
“But the job is not yet done and so the government will go on taking the difficult decisions necessary to deliver a sustainable recovery for all.”
The IMF’s 2.4% forecast for the UK is the same as the outlook from business group the CBI and the Office for Budget Responsibility, which publishes independent forecasts for the government. The British Chambers of Commerce is more optimistic and expects 2.7% growth.
Blanchard’s summary of conditions around the world highlighted rebalancing challenges for Japan, big concerns about southern Europe and threats to emerging markets from changing monetary policy. Prospects for the world’s largest economy, the United States, were improving.
“US growth appears increasingly solid. Private demand is strong. As a result of the December budget agreement, fiscal consolidation, which weighted on growth in 2013, will be more limited in 2014. These factors lead us to forecast 2.8% growth for 2014, compared to 1.9% in 2013,” he said.
Japan’s growth is forecast to hold at 1.7% in 2014. “This is good news. But this growth has come largely from fiscal stimulus and from exports. For growth to be sustained, consumption and investment have to take the relay,” Blanchard said.
Southern Europe continues to be the “more worrisome part of the world economy”, he said, highlighting strong exports but weak internal demand.
For emerging market and developing economies the IMF forecasts growth will remain high but highlighted a risk from US monetary policy. China faced a “delicate balancing act” of containing the build up of risks in the financial sector without excessively slowing growth, Blanchard said.
Blanchard echoed other economists in highlighting the risks of a return to a more normal monetary policy after years characterised by large scale quantitative easing programmes and ultra-low borrowing costs in many countries.
“We can expect complex capital movements across countries for some time to come. In that environment, the evidence from last year is that emerging market economies with weak macro frameworks may be most affected,” he said.
The second key risk, already flagged earlier this month by the IMF, was in the eurozone where some countries have already slipped into deflation. The lower inflation and the higher the deflation rate, the more dangerous that was for the recovery.
“While our baseline forecasts are for low but positive inflation in the euro area, the risk is that inflation turns into deflation,” said Blanchard.
“Deflation means higher real interest rates, higher public and private debt burdens, lower demand, lower growth, and further deflation pressure. To avoid that risk, accommodative monetary policy remains of the essence. And so is the strengthening of banks’ balance sheets.”
He concluded: “In short, recovery is indeed strengthening. But much work remains to be done.”
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