IMF Upgrades Global Growth Outlook But Singles Out Britain As A "Notable Exception"

Confirming the shift to a more optimistic worldview by IMF unveiled last week by Christine Lagarde, in its latest World Economic Outlook released on Tuesday, the IMF raised its 2017 and 2018 GDP growth forecast for the U.S., China, euro area and Japan as follows:

  • Global GDP to expand 3.6% in 2017 and 3.7% in 2018, up from July estimates for 3.5% this year and 3.6% next
  • U.S. to grow 2.2% this year, up from July est. of 2.1%
    • U.S. to grow 2.3% in 2018, up from July est. of 2.1%
  • China to grow 6.8% this year, up from July est. of 6.7%
    • China to grow 6.5% in 2018, up from 6.4% in July est.
  • Euro area to grow 2.1% this year, up from 1.9% in July est.
    • Euro area to grow 1.9% in 2018, up from 1.7% in July est.
  • Japan to expand 1.5% in 2017 and 0.7% in 2018, up from July est. of 1.3% and 0.6% respectively

“Growth in most of the other advanced economies, with the notable exception of the UK, picked up in the first half of 2017 from its pace in the second half of 2016, with both domestic and external demand contributing,” the IMF said in its World Economic Outlook.

Having troughed in late 2016, the IMF's 2017 growth forecast is now well off the lows, and is back to a level last seen in the first quarter of 2016.

Also notable is that the IMF boosted its all important global trade volume (goods and services) forecast, to 4.2% and 4.0% growth in 2017 and 2018 and up 0.2% and 0.1% respectively from the previous forecast, the IMF also cuts it advanced economy inflation outlook by -0.2% and -0.1% for 2017 and 2018 to 1.7% and 1.7%, for the next two years. Similarly it also cut its EM inflation forecast to 4.2% (-0.3%) and 4.4% (-0.2%). While the IMF now expects a 17.4% increase in oil prices in 2017, it then expects a slight moderation by -0.2% in 2018.

The full breakdown is below:

The IMF also encouraged countries to take advantage of the benign climate to boost growth potential and cushion the impact of the next downturn, something it has done during the publication of every previous WEO report in the recent past. The IMF also urged central banks in rich nations to keep monetary policy loose until there are firm signs of inflation.

To be sure, it was not all rosy: there was this warning from IMF Chief Economist Maurice Obstfeld: “A closer look suggests that the global recovery may not be sustainable - not all countries are participating, inflation often remains below target with weak wage growth, and the medium-term outlook still disappoints in many parts of the world."

And while the IMF was quite optimistic on the rest of the world, it singled Britain out as a “notable exception” to an improving global economic outlook on Tuesday, as it cut its forecast for UK growth and said the long-term negative effects of Brexit were beginning to show.

“The UK, where the strong depreciation of the pound since last summer has passed through into higher consumer prices, is an exception to this pattern [of low inflation in other countries].”

The IMF cut the UK’s growth forecast for 2017 by 0.3% to 1.7%, well below the average growth rate in other advanced economies. The fund also sharply reduced its estimate of the UK’s long-term growth outlook.

While the IMF expects the global economy to accelerate next year, it is predicting a further slowdown in the UK, to 1.5 per cent growth, for 2018. The IMF’s projection is broadly in line with consensus, but significantly more optimistic than the recent 1 per cent growth forecast by the Organisation for Economic Co-operation and Development.

The IMF maintained that Mr Hammond will be able to keep to his self-imposed rule to bring borrowing down to 2 per cent of national income by 2020-21. But the fund increased its forecasts for the deficit in Tuesday’s report, saying it now expected the UK’s structural deficit to be 1.2 per cent of national income in 2021.

As the FT notes, the IMF’s forecasts are slightly more optimistic than the current consensus, but are unlikely to offer cheer to Philip Hammond, the chancellor, as he travels to Washington for the annual IMF meetings this week. Eurosceptics have called for Mr Hammond to be sacked, believing that his pressing for a long post-Brexit transition period from EU membership amounts to effective resistance to leaving the bloc.

The IMF said the squeeze on household finances in the UK had hit growth in the first two quarters of this year, and “the medium-term growth outlook is highly uncertain and will depend in part on the new economic relationship with the EU and the extent of the increase in barriers to trade, migration and cross-border financial activity”.


Mr Obstfeld said he sympathised with the “harsh trade off” facing the Bank of England as it ponders whether to raise interest rates at its November meeting.


“It’s hard to judge to what extent above target inflation could feed through into nominal wages and complicate things,” he said. “At some level the BoE is in the position you don’t want to be in as a central banker where you’re facing a negative supply shock which directly brings your inflation mandate into conflict with what is possibly better in terms of economic growth.”

Maurice Obstfeld, chief economist at the IMF, said the reduction in the fund’s long-term outlook for the UK from an annual growth rate of 1.9 per cent to 1.7 per cent was a direct consequence of leaving the EU. “We forecast in the pre-referendum period, as did others, there would be long run negative effects on the British economy,” he said. “I think we’re starting to see those."

And let this be a warning, the IMF felt like adding but did not, to all those other countries who dare to think that their lives will be better outside the Eurozone or EU rather than in it...