IMF upgrades UK growth forecast but warns global trade system could be "torn apart"

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The International Monetary Fund predicts UK output growth of 1.5 per cent this year (Source: Getty)

The International Monetary Fund (IMF) today upgraded its forecasts for the UK economy amid stronger global growth, but warned that the world’s trading system is “in danger of being torn apart” by a trade war.

UK GDP will grow by 1.6 per cent this year, the forecasts said, a 0.1 percentage point upgrade from its previous prediction – although still a slowdown compared to the 1.8 per cent rate of output growth last year.

The stronger outlook for the British economy comes amid a strengthening world economy, with output growth now projected to hit 3.9 per cent this year and next. In the UK, the IMF cited weak business investment in the face of “heightened uncertainty about post-Brexit arrangements” as a key reason for slowing growth.

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The large 0.2 percentage point upgrade for global growth for both years was prompted by better prospects across the Eurozone as well as a boost to US growth from unfunded tax cuts.

The “growth spurt” enjoyed by the world economy has relied on an increase in investment responding to “pent-up demand” still left over from the financial crisis and a 4.9 per cent surge in global trade.

Yet amid the short-term good news the IMF has been strident about the dangers facing the global economic system.

US President Donald Trump last month rattled investors around the world by introducing tariffs aimed mainly at reducing its trade deficit with China on a wide range of products, with China responding in kind.

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Maurice Obstfeld, director of the research department at the IMF, one of the pillars of the global financial system since the Second World War, said an “escalating cycle of trade restrictions and retaliation” threatens global prosperity.

“The first shots in a potential trade war have now been fired,” he said. “The multilateral rules-based trade system that evolved after World War II and that nurtured unprecedented growth in the world economy needs strengthening. Instead, it is in danger of being torn apart.”

The trade conflict could “intensify”, he added, if a US fiscal expansion introduced by President Donald Trump widens the trade deficit which he is also aiming to reduce. Added to that, the report notes that tax changes will “exacerbate income polarisation, which could affect the political climate for policy choices in the future”.

Read more: IMF downgrades UK growth expectations as Brexit creates "key uncertainty"

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