Not so long ago, the IMF was in love with Britain. Each time it released its quarterly economic global economic outlook survey, it heaped eulogy on the UK and its then chancellor, a certain G Brown.
Now the boot is on the other foot. The UK will be the worst performing of all the world’s developed economies in 2009, says the report.
The economy will contract by 2.8 per cent this year, predicted the IMF. This will be the worst economic performance in any year since the end of the Second World War.
Mind you, we may be hitting the ground faster than everybody else, but at least we won’t be running along at rock bottom alone for very long.
The IMF also expects Germany to contract by minus 2.5 per cent, the US by minus 1.6 per cent and Japan by minus 2.6 per cent. France, Spain and Italy are expected to contract by minus 1.9, minus 1.7 and minus 2.1 per cent. As for China, it is now expected to grow by a mere 6.7 per cent, and before you say, well at least China is not doing too badly, just bear in mind economists reckon China has to grow by 8 per cent just to keep unemployment in check.
The global economy, by the way, is expected to expand by 0.5 per cent, and will also be the worst performance since the end of the last World War.
Mind you, not everyone is so sanguine. Yesterday saw the unveiling of the Green Budget from the Institute of Fiscal Studies, in conjunction with Morgan Stanley. The Morgan Stanley bit of the green budget consisted of its own projections for the UK economy. Its conclusion, well, its central forecast, is for the UK to contract by 1.3 per cent this year. It also reckons, by the way, that the recent stimulus to the economy will boost GDP by 5 per cent, with the cuts in interest rates boosting GDP by 1 per cent, the fiscal stimulus by 1 1/4 per cent, and the crash in sterling by 3 per cent.
So, actually, Morgan Stanley was a good deal less gloomy than most economists, although it is worth pointing out it said the risks to its forecast are on the downside.
But you know what, there is a problem with these forecasts.
Just two and a bit months ago, the IMF predicted a slowdown for the UK of just 1.3 per cent. Last April it wasn’t expecting any major economy to contract this year.
The IMF, just like all the other forecasters, has been struggling to keep up with reality. Economic models have not been throwing up the kind of scenarios that common sense would have suggested.
And while the IMF reckons the UK will be the worst performing of all developed economies, there are reasons to believe this forecast may prove wrong.
The UK is expected to suffer more than most in part because of our reliance on the City. Banks are in freefall, therefore so is the UK. We are paying the price for being too reliant on one sector.
That is all very well, but aren’t Germany and France over reliant on the auto sector? In fact, it could be argued that these economies are less diversified than the UK.
In the depression of the 1930s, it was the economies with big current account surpluses which suffered the most.
Morgan Stanley said the fall in sterling would lead to a 3 per cent boost in the UK’s GDP. But even this projection could be pessimistic. The UK economy is realigning; this means new export sectors may evolve.
In the short term, it seems the big worry for the UK is that falling asset prices will lead to a rise in savings, and a fall in consumption. But, in the medium term, Morgan Stanley reckons the effect of falling asset prices is that we may start pushing to work longer hours. Retirement dates will be put back. The upshot of this will be a rise in the available pool of labour. This will boost potential output, and providing the Bank of England reacts to this by continuing to pump money into the system, this will in turn lead to a rise in GDP, a rise that could even make up for the size of the contraction. (Not that we all feel especially happy about retiring at an older age.)
Don’t be surprised to discover that, from now on, projections for the Eurozone get steadily worse, but for the UK, 2009 prospects suddenly start to improve.
© Investment & Business News 2013