The International Monetary Fund is widely expected to raise its outlook for the UK on Tuesday, pushing up the country’s growth forecasts by more than for any other major economy.
The Washington-based fund has been a critic of the UK’s over-dependence on consumers as well as the government’s Help to Buy housing market scheme. But it will bring a welcome boost to chancellor George Osborne when it updates its World Economic Outlook from last October’s forecasts.
Back then it predicted UK national output would rise 1.9% in 2014 but is now expected to predict growth of 2.4%, according to a Sky News report. The IMF said it did not comment on leaks.
The fund is also expected to upgrade its outlook for the global economy, which in October it said would expand by 3.6% this year. That would reflect the cautiously optimistic tone in a New Year’s speech from its managing director, Christine Lagarde, last week.
“This crisis still lingers. Yet optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous … the year in which the seven weak years, economically speaking, slide into seven strong years,” she said.
If confirmed, the substantial upgrade to the UK is likely to be seized on by Osborne as further proof the coalition’s “economic plan is working” – an oft-used phrase in recent weeks as indicators have largely pointed to growth picking up.
The fund has in the past been highly critical of the coalition’s austerity drive. In a damning indictment of the British chancellor’s economic policies last year, the IMF’s chief economist Olivier Blanchard warned Osborne would be “playing with fire” unless he eased the pace of budget cuts.
The IMF has also echoed other economists, including experts at the UK’s own Office for Budget Responsibility, who said that the UK remains over-dependent on debt-fulled household spending to grow.
The latest crop of official data underscored those concerns, with weaker outturns for construction and manufacturing and a jump in Christmas retail sales.
Economists generally feel, however, that overall growth will pick up this year and the IMF is just the latest of a string of forecasters to raise the UK’s outlook.
A report from EY Item Club on Monday forecast UK economic growth would pick up to 2.7% this year from 1.9% in 2013. It too warned the recovery was not built on solid foundations, however, due largely to the pressure on household incomes.
Peter Spencer, chief economic adviser to the EY ITEM Club said: “It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time. The weakness of real earnings is proving to be the government’s Achilles heel and could prove to be the weak spot in the recovery.
“Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio.”
There have also been warnings that the recovery is not being felt throughout the UK, and is instead largely benefiting London and the south-east.
A study by the TUC trade unions group on Monday said the recent recovery in jobs had failed to reach the north-east, the north-west, Wales and the south-west, leaving them in the same situation or worse at providing jobs than they were 20 years ago.
The overall unemployment rate for the UK has been coming down faster than policymakers and most other forecasters had expected. Official data on Wednesday are expected to give a jobless rate of 7.3% for November, down from 7.4% the previous month.
Many economists expect the continuing drop in unemployment will prompt the Bank of England to tweak its forward guidance. At the moment, the BoE’s guidance is that, barring various exceptions, it will not consider raising interest rates from their current 0.5% until a threshold of 7% unemployment is reached. The Bank may well lower that threshold for considering a hike to 6.5% unemployment, economists say.