IMF downgrades US and UK growth

Donald TrumpDonald Trump’s administration now looks less likely to follow expansionary policies

The UK and US economies will expand more slowly in 2017 than previously predicted, according to the International Monetary Fund (IMF).

It said “weaker-than-expected activity” in the first three months of the year meant the UK would grow by 1.7%, compared with an earlier 2% forecast.

And the IMF revised down its US outlook from 2.3% to 2.1%.

However, its overall global economic predictions – of 3.5% growth in 2017 and 3.6% in 2018 – remain unchanged.

Meanwhile the outlook for several eurozone economies is brighter than initially thought, with countries including France, Germany, Italy and Spain seeing growth forecasts revised up.

In its latest World Economic Outlook, the IMF said the “pick-up in global growth” that it had anticipated in its previous survey in April remained “on track”.

But it added that while the global growth projection was unchanged that masked “somewhat different contributions at the country level”.

‘Fundamentals strong’

The UK growth forecast for 2018 remains unchanged at 1.5%, but US growth for next year is now predicted to come in at 2.1%, instead of the 2.5% previously forecast.

“While the markdown in the [US] 2017 forecast reflects in part the weak growth outturn in the first quarter of the year, the major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of US fiscal policy changes,” the IMF said.

“Market expectations of fiscal stimulus have also receded.”

A UK Treasury spokesperson said the IMF forecast underlined why the government’s plans to increase productivity and get “the very best deal with the EU” after Brexit were “vitally important”.

“Employment is at a record high and the deficit is down by three quarters, showing that the fundamentals of our economy are strong,” they added.

Economists warn that IMF forecasts are not always right.

“The IMF, a multi-lateral institution, takes a step back and looks at a broad range of activities across the world, but they do sometimes get things wrong and we wouldn’t want to put too much emphasis on what’s been released today,” said Lucy O’Carroll, chief economist of Aberdeen Asset Management.


Analysis

By Andrew Walker, BBC World Service economics correspondent

The downgrade in the UK’s forecast reflects the weak start to the year.

The economy grew by 0.2% in the first three months. That is all we get by way of explanation from the IMF.

It is a short report – just seven pages – and it updates the IMF’s assessment for the whole world economy so there isn’t much space to spell it out.

The IMF is well known, some would say notorious, for warning before last year’s referendum of the adverse economic consequences of leaving the European Union.

Do the agency’s economists think that the downgrade reflects evidence suggesting that they were right? The report doesn’t say. We can only guess.

But we will get a bit of hard evidence on how justified the downgrade was or was not later this week, when the Office for National Statistics publishes its first estimate of economic growth in the second quarter of the year.


President Donald Trump’s administration had been widely expected to pursue policies including tax cuts and infrastructure investment, which would have given a boost to the US economy.

However, that outcome now appears less likely.

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Eurozone ‘momentum’

The biggest eurozone revisions were for the Spanish and Italian economies. Spain is now forecast to grow 3.1% this year, up from the previous prediction of 2.6%. Italy’s 2017 growth forecast has risen from 0.8% to 1.3%.

The euro area as a whole is expected to grow by 1.9% this year, up from 1.7%.

The IMF said first-quarter growth in many of those countries better than expected, and that there was evidence of “stronger momentum in domestic demand than previously anticipated”.

China’s growth projections have also been revised up, reflecting, the Fund says, “a strong first quarter of 2017 and expectations of continued fiscal support”.

Its 2017 forecast has risen from 6.6% to 6.7%, while growth in 2018 is now expected to be 6.4% instead of 6.2%.

The IMF hailed China’s “policy easing and supply-side reforms”, including efforts to reduce excess capacity in the industrial sector.

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