IMF rethinks gloomy forecast for Britain

The International Monetary Fund (IMF) will take another look at its gloomy forecasts for the UK economy this week.

A team from Washington DC is in London to carry out the UK’s annual health check.

It will deliver its verdict after a round of summits with the Bank of England, the Treasury, independent watchdogs from the Office for Budget Responsibility and the city’s regulator, the Financial Conduct Authority.

The fund currently predicts that the UK will be the weakest of all major industrialized nations, with an economy set to contract by 0.3 percent this year.

But Chancellor Jeremy Hunt, who has vowed to prove the fund wrong, claims the UK will do better.

IMF Director Kristalina Georgieva and Hunt will hold a press conference on Tuesday to discuss the fund’s findings.

It promises to be a lively affair.

Hunt has accused the IMF of consistently underestimating the UK and recently clashed with Georgieva, who told her that the UK economy was the fastest growing in the G7 last year and had so far avoided a recession.

Speaking at the IMF’s spring meeting in Washington last month, he said it had “undershot” its forecasts for the UK economy in “every year but one since 2016” and was “just one of many forecasters”.

The IMF has a consistent record of being overly negative about the UK’s outlook.

Of the 28 forecasts for the UK economy between 2016 and 2022, 23 were too gloomy. Only three were too optimistic.

The latest period of gloomy forecasts may well contribute to the pessimistic count.

Recent developments in the UK’s outlook have put pressure on the IMF to reconsider its dejected stance on Britain.

“Every month that goes by, the IMF forecasts seem to be wrong,” said a source at the Treasury Department.

The IMF team arrived last week as part of an annual inspection – known as Article IV – where economic and financial information is collected and developments and policies are discussed.

The UK has been at the bottom of the fund’s growth forecasts for nearly a year, with economists citing high energy prices and interest rates as factors.

Last month it predicted that British production would shrink by 0.6 percent.

But it was forced to revise that gloomy forecast as the economy proved more resilient than expected.

Hunt said this was due to the government’s reversal of former Prime Minister Liz Truss’s mini-fiscal policies last year, which led to market turmoil and criticism from the IMF.

Hunt was boosted earlier this month when the Bank of England changed its mind about the outlook.

The Bank now thinks the UK will avoid a recession this year and achieve a soft landing after a dozen consecutive rate hikes to tame the country’s double-digit inflation.

It pointed to stronger global growth, lower energy prices and a stronger-than-expected labor market ahead of its turnaround.

This week’s data is expected to show that the overall pace of price increases has slowed to 8.3 percent, although food inflation remains double.

Besides the UK, Germany is the only other major economy that the IMF, the global lender of last resort, expects to shrink this year.

The Bank of England expects inflation to fall sharply this year and fall back below the target of 2 percent in 2024.

But experts fear that companies will continue to pass on recent energy increases to their customers through higher prices, meaning interest rates may have to stay high for longer.

Bank of England Governor Andrew Bailey admitted last week that taming the wage and price spiral unleashed by inflation could take longer to emerge.

He is concerned about so-called ‘second-round effects’, when an external shock, such as the war in Ukraine, triggers a cycle of companies raising prices and workers demanding higher wages.

Bailey was criticized for not raising rates sooner as the economy emerged from the pandemic, causing inflation to tear.

The Bank has since allowed 12 rate hikes in a row, bringing the official cost of borrowing to 4.5 percent – ​​the highest in 15 years.

Traders are expecting at least one more increase this year.

The IMF works with 190 member states to ensure responsible spending. It also offers cheap loans to low-income countries.

In 1976, the Labor government had to apply to the IMF for an emergency loan of almost $4 billion (£3.2 billion) – the largest ever at the time – to support the pound.

In return, the fund pushed for major cuts in government spending.