IMF makes big boost for UK official

The International Monetary Fund (IMF) forecast for UK growth this year has been rapidly revised upwards today, from the 1.9 per cent projection in October, to 2.4 per cent.

In April last year, the IMF expected growth of only 1.5 per cent for the UK.

As widely expected, the Fund is easing off on criticism of the UK, but keeps one gun aimed, insisting that there is still a lot of economic slack.

As recently as nine months ago, IMF chief economist Olivier Blanchard said chancellor George Osborne was playing with fire by pursuing austerity policies in a low-growth environment.

The next biggest positive update is for the Spanish economy, with 0.6 per cent growth now expected for 2014, from 0.2 per cent three months ago.

Japanese Prime Minister Shinzo Abe gets some welcome relief: The IMF says his stimulus measures will partly offset his sales tax hike in April, keeping growth this year at 1.7 per cent, a 0.4 percentage point improvement on what was expected last year.

Russia takes the IMF’s largest negative revision, with growth of only two per cent now expected for 2014, down from three per cent last quarter.

The monetary policy conundrum

Two of the major risks highlighted by Blanchard demonstrate the double-edged sword that policymakers are being asked to hold this year - a normalisation monetary policy is being priced in, even while inflation remains subdued in the US, and may be ebbing away completely in the Eurozone.

While there is nothing magical about the number zero, the lower the inflation rate, and a fortiori the larger the deflation rate, the more dangerous it is for the Euro recovery. Deflation means higher real interest rates, higher public and private debt burdens, lower demand, lower growth, and further deflation pressure.

UBS Asset Management’s Joshua McCallum adds:

If the missing element in explaining inflation should worry the ECB, the Bank of England should be even more perplexed. There is no consistent relationship between the output gap and inflation in the UK, even when accounting for the effects of the recent years’ VAT change.