I informed him that the real decline was in business investment and household income, and he responded: “You can pick your numbers, and I could tell you that the United States’ tech industry expanded to the third largest in the world last year if you like that sort of thing. Statistics can be found to support either side of an argument, but the opportunities in the UK are truly remarkable.”
The International Monetary Fund (IMF) appeared to join the ranks of these pessimists with its most recent update to its global economic forecast last night. This forecast is just that, a forecast, even if it comes from the most prestigious international financial institution in the world. However, it can be useful if the data it collects reveals a different story in each of the countries it analyses.
The United Kingdom appears to be an anomaly here. The only major G7 country predicted to contract this year, growth projections for this country have been consistently revised downward since the fall. Russia, which has been hit by sanctions, was the only country in the new set of 15 projections that did not show growth beyond 2023.
After the mini-budget in September, the economic climate in the United Kingdom deteriorated. In addition to the more general shock of still high energy prices, the necessary increases in taxation and interest rates will slow the economy, with a disproportionate impact on the United Kingdom.
The more in-depth response is that the IMF isn’t the only respected organisation concerned about the UK economy’s vulnerability to recent shocks. The Bank of England is becoming increasingly concerned about why the United Kingdom, in contrast to other major economies, has not seen a full return of its workforce since the pandemic.
The size of the economy and the duration of high inflation would be affected by such a reduction in the labour force. Expect Thursday’s publication of the Bank’s updated forecast to reveal the institution’s latest thinking on the matter. If such factors might affect the level of borrowing, the Treasury will hear from the government’s own forecasters on this subject tomorrow. An additional question on this one-year anniversary of Brexit is whether or not leaving the EU has played a role.
With less competition and more trade and employment barriers with our neighbours, most economic analyses at the time pointed to higher inflation and lower growth than similar economies. Several factors, including Brexit, were identified by the House of Lords Economic committee’s extensive study of the labour shortage.
The IMF’s decision to lower its forecast for the world economy today has its roots in recent economic developments in the United Kingdom. Even though Germany’s unexpected drop in real GDP data for the previous quarter was released yesterday, the IMF may still be somewhat optimistic about EU nations.
However, “global factors” can’t be the only explanation if the UK’s predicted poorer relative performance on growth and inflation materialises this year and persists.