I have two problems with the latest analysis of UK economic prospects in the IMF World Economic Outlook released this week.
First, it is slightly dated and doesn’t take on board some important recent releases. The IMF is behind the curve. Second, the UK forecasts for next year appear to be based more on assumption than economic analysis.
The latest Economic Outlook – published on 4 October – was signed off on 23 September. Clearly, for this to happen, the analysis of UK prospects was completed well before then. M4x broad money supply was released on 29 September, and so even if the IMF closely monitored this series – which it doesn’t – it wouldn’t have had the latest numbers available. The latest numbers show a further acceleration in broad money M4x growth to 7.3 per cent (year on year) in August. Between April and August this year, the year on year growth rate in UK broad money has accelerated from 4.1 per cent to 7.3 per cent – the fastest rate of growth since 2008.
Other important economic statistics wouldn’t have been taken on board either. The ONS Index of Services for July (published on 30 September) covers almost 80 per cent of GDP. The services index rose 0.4 per cent (month on month) and 2.9 per cent (year on year) – a pretty robust performance.
And it’s not just a services story. The September PMI for manufacturing rose to 55.4, mostly driven by domestic orders, but exports also, helped by the weaker pound. As this is written, the pound is touching a 31-year low against the dollar, with sterling down 18 per cent (year on year). This has led to speculation that over the next 12 months sterling could fall to parity with the dollar. This is a powerful monetary stimulus, probably equivalent to a 2 per cent reduction in interest rates – a bazooka not a pea-shooter.
Looking beyond the company sector, to the recent behaviour of households, also provides reassurance. The GfK measure of consumer confidence has bounced back towards zero – a level associated with trend GDP growth. There is also a possibility of a little bit – not a lot – of economic support from the household savings ratio, which could lower from the 5.1 per cent rate recorded in the second quarter of 2016.
We’ll turn now to my second concern with the IMF’s view of the UK economy. The IMF has raised its UK GDP growth forecast to 1.8 per cent this year. It was too pessimistic in its downward forecast revision in July and has been forced to retrace its steps.
So far so good. Unfortunately, however, this is not the end of the story. The IMF says that, even though it was wrong about the economy this year, it will be right about it next year. Consequently, it has revised down projected GDP growth to 1.1 per cent in 2017, on the basis that the UK will eventually suffer from the effects of the referendum result. There would appear to be a lot more assumption than economic analysis in the 2017 forecast.
In contrast, at macronomics, we have consistently argued that, since the referendum, the available economic evidence has pointed towards an economy strengthening, not weakening. We’ve drawn this conclusion by focusing on the behaviour of broad money growth and the implication for nominal GDP.
Firm money supply growth, a falling pound, an extension in QE, a backing away from fiscal austerity and stronger indicators of services and manufacturing point to an economy strengthening not weakening.