Should we believe the IMF?

Jeremy Hunt is under renewed pressure to revive the economy as the IMF warns that UK growth this year will be worse than Russia’s, and half a million workers prepare to strike.

Up to 11,000 schools are expected to shut tomorrow as teachers join train drivers, civil servants, university lecturers, bus drivers and security guards in a de facto general strike, the largest in a decade.

The chances of a breakthrough in pay negotiations already looked slim before Richard Holden, a transport minister, insisted today that the government could not afford above-inflation pay rises because of the knock-on effect on the wider economy.

Holden’s comments followed the publication of the IMF’s latest forecast predicting that the UK economy will contract by 0.6% this year – a 0.9 percentage point downgrade. It would put Britain bottom of the heap among G7 countries, and behind even sanctions-stricken Russia. The IMF cited the UK’s tighter fiscal and monetary policy as one of reasons for its economy doing worse.

It’s a brutal assessment. But zoom out a little, and the picture isn’t quite so bleak. The UK outperformed most economic forecasts last year and grew faster than most other Western countries. The IMF predicts a modest UK recovery next year, in line with other G7 countries.

While the IMF’s verdict is stark, the fund doesn’t have a great track record with predictions. (Julian Jessop unpicks the forecast here.) The real danger of the doom and gloom is that it becomes a self-fulfilling prophecy, with investors put off from pumping money into Britain because of its dire economic reputation, real or imagined.  

Even so, there’s no denying the economy is in trouble, and the UK does seem to be struggling compared to other advanced economies.

The question is why. As the CEBR’s Sam Miley writes in a fascinating piece of analysis, one reason the French economy, at least, is pipping the UK is its differing energy composition and the French government’s shrewder energy subsidies to consumers.

Another answer that’s often given is Brexit. Today marks the third anniversary of the UK leaving the EU, so perhaps it was inevitable that the IMF forecast breathed fresh fury into the perpetual Leave/Remain debate on Twitter, if not in the real world.

The forecast appeared to complement analysis by Bloomberg Economics, released today, calculating that Brexit is costing the UK £100bn a year and the nation’s economy is 4% smaller than it might have been had the UK not left the bloc.

While Brexit is undoubtedly playing a role in Britain’s economic malaise, Doug McWilliams writes that it cannot be the whole story. Instead, he points to “a dramatic weakening of public service productivity” – a puzzle the UK has been grappling with for over decade – “which has created a fiscal crisis and caused tax cuts to be reversed.”

Paul Johnson, director of the Institute for Fiscal Studies, said it is “hard to see what’s driving [the IMF] forecast”, but noted that there are a few things affecting the UK more than other countries: “One in particular is the loss of people from our labour force. We have heard a lot about the fact we have lost half a million-plus people from work – people retiring early, immigrants not coming in from the European Union and so on. That is not affecting any other country in Europe.”

The Chancellor is due to meet with the influential 1922 Committee of backbench Tory MPs this evening. He will try to convince a sceptical crowd that despite fears about inflation, growth, productivity and strikes, things are under control. It could be a tough sell. 

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