There are many reasons to be positive about the UK’s economic outlook and Brexit

There are many reasons to be positive about the UK’s economic outlook and Brexit

Overnight the International Monetary Fund (IMF) provided an update of their global economic outlook. Although the IMF is not a great forecaster, we take it seriously because it is an indicator of where benchmark thinking is on global growth. The IMF sees solid global growth this year and next and, in particular, it now expects a significant increase in the volume of world trade, up from 2.3% growth last year to 4% this and 3.9% next. This latter statistic, in particular, should be very positive for UK exports, which have grown far more strongly over the last year than generally expected.

Notwithstanding that, the factor that will likely attract most attention here in the UK was a downward revision by the IMF to UK economic growth and an upward revision to forecasts for the euro area. The latter is to be welcomed and should not be a surprise; the European Central Bank has pumped huge amounts into the euro economy, which is also at an early stage of the economic cycle, having been weak for so long. The IMF sees euro area growth of 1.9% this year and 1.7% next. This is to be welcomed and is in line with my thinking, but still does not disguise deep structural flaws in the euro, including big regional imbalances. But euro area growth should continue.

As for the UK, the IMF cut this year’s growth forecast by 0.2% to 1.7% and kept it unchanged at 1.5% for next year. The downward revision for this year is because the growth figure already released for the first quarter was weaker than had been expected: up 0.2% on the previous quarter. Since then, even the Bank of England has predicted growth rising to 0.4% in the second quarter. Last July and in July 2015 the IMF also cut UK growth forecasts, so a reduction now is not an exception.

Over the last year, economic forecasts have proved too pessimistic. The weaker pound has helped, as indeed it should have done, as the pound was overvalued previously. The Bank of England’s easing last autumn was expected by me, but its impact should not be exaggerated as there was solid monetary growth even as it eased.

The IMF’s forecasts for the UK, while weaker than mine, also probably reflect the mixed picture we have seen since the election. This has led to a split decision on the Bank of England’s Monetary Policy Committee. I see 2% growth this year and next. In the spring Budget the independent Office for Budget Responsibility predicted 2% this year and 1.6% next.

Latest data shows unemployment is at a 42-year low, hiring in The City up 17% in the year to June and on the ATK Kearney global investment index the UK has risen from fifth to fourth. All this is good. Of course, the outlook for any economy depends upon the interaction between the fundamentals, policy and confidence. And the latter remains important.

Real incomes are being squeezed, and clearly the IMF has taken that into account in their forecast, but as we move through next year real incomes are likely to be rising, which will be positive. It is often overlooked that the rise in inflation from last June to this spring was seen globally, rising in the US, Germany and the euro area, among others, not just here. Since the spring, inflation has eased globally but because of the pound, rose further here. UK inflation fell last month, although the peak may be see this third quarter, after which inflation here should follow the global trend and decelerate. If so, then this will ease the squeeze on real incomes and boost consumer spending next year. Indeed today the IMF said that globally, inflation pressures are muted, core inflation is low and wage pressures are subdued.

After seven years of solid growth it would be no surprise if the UK economy slowed slightly, as that is the way economies operate, but even with this, there are many reasons to be positive about the UK’s economic outlook and Brexit.

The outlook for the economy depends upon many factors. This includes our exit negotiations and future relationship with the EU. It also depends upon our trade with the rest of the world where we should be optimistic given the outlook for global growth and that we can trade freely and easily under the WTO. And it depends upon the domestic economy and the UK using its new-found freedom after Brexit to boost infrastructure, investment and innovation. This is not the time to be pessimistic but realistic about near-term challenges and optimistic about longer-term opportunities.