Today the International Monetary Fund has upgraded its growth forecasts for the UK: from 0.5 per cent this year to 0.7 per cent, followed by a 1.5 per cent rise in 2025 (unchanged from its previous update). These forecasts still sit slightly below the Office for Budget Responsibility’s most recent predictions – but only just. The IMF’s latest forecasts come less than two weeks after the UK economy defied predictions and grew by 0.6 per cent in the first quarter of the year, exceeding practically all expectations and confirming that recession ended back in 2023.
As I noted earlier in the month, when the provisional GDP figures were announced, the government must be careful about how it sells good news. The headline figures around growth, both forecast and confirmed, do not necessarily reflect how well-off voters are feeling, especially as GDP per capita still hasn’t recovered to pre-pandemic levels. Still, it is hard to deny that the economic situation is improving, and you can tell from today’s comments that confidence in this narrative is growing. Responding to the upward revisions, Chancellor Jeremy Hunt noted that according to the ‘forecast we will grow faster than any other large European country over the next six years – so it is time to shake off some of the unjustified pessimism about our prospects'.
Hunt isn’t just relying on the IMF’s forecasts for his optimism. This week alone the Chancellor has other pieces of good economic news that point towards a better summer. The IMF’s estimate that the Bank of England has room to cut interest rates three times before the end of the year was hinted at just yesterday by the Bank’s deputy governor Ben Broadbent. While Broadbent (who is leaving the Bank in July) did not put a figure on the number of rate cuts the Bank might deliver in 2024, he all but confirmed speculation that Threadneedle Street is gearing up for its first rate cut this summer. ‘If things continue to evolve with [Bank] forecasts…’ he said in his speech, ‘...then it’s possible Bank Rate could be cut some time over the summer.’
We learn more about that evolution tomorrow, when the inflation data for April is published. It’s a big update: the headline inflation rate is expected to slow to (or around) the Bank’s target of 2 per cent, marking the end of the inflation crisis that has plagued the country since autumn 2021. The BoE does expect the rate to pick up slightly towards the end of the year, but nothing compared to what's happened the past few years. Having acknowledged on multiple occasions now that a rate cut is compatible with keeping monetary policy fairly restrictive, tomorrow’s inflation update should be another indicator to the Bank that it can start a slow and steady process of cutting rates.
These updates are no silver bullet for the long-term trajectory of the economy. Growth may be better than expected this year, but it’s still far below a rate needed to substantially boost the economy. Alongside calls for more pro-growth initiatives, the IMF also notes today that ‘tough choices’ cannot be avoided in the UK, as rising debt levels and growing demands on public services create an unsustainable situation. These are the problems, of course, that no political party wants to talk about heading into an election: at a time when politicians want to be making promises, there is no shortage of reminders that there is no scope to do so.
Listen to Kate Andrews, Katy Balls and James Heale discuss the IMF’s forecasts on Coffee House Shots:
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