Growth risk downplayed: The IMF doesn’t seem to realise how the cost-of-living crisis could hurt UK plc, says ALEX BRUMMER
How much faith can we place in the latest forecasts from the International Monetary Fund?
The spring edition of its key World Economic Outlook is laced with dire warnings about the ‘unprecedented nature of the shocks’ to the global economy, from Covid to the barbaric war on Ukraine.
The impact on inflation and interest rates in advanced, emerging market and what are now called frontier nations (those least able to take the pain) will be severe.
The IMF predicts the impact on inflation and interest rates in advanced, emerging market and what are now called frontier nations will be severe
The WEO suggests the Ukraine war could mark a threat to the global economic order as we know it.
Among the biggest geopolitical changes of the late 20th century were the breakdown of the Soviet Union and its Eastern European satellites after 1989 and China’s acceptance of free trade when it joined the World Trade Organisation in 2001.
The IMF says that post-Ukraine, there is a risk of a ‘more permanent fragmentation into geopolitical blocks with distinct technology standards, cross-border payment systems and reserve currencies’.
In the earliest stages of Russia’s fight against Ukraine’s sovereignty, there was a unified effort among the advanced nations to block Russia from the global financial system. That has been followed by Western trans-national companies, such as car maker Stellantis, shuttering operations in Moscow at considerable cost.
In the latest development, Britain is cancelling recognition of the Moscow stock exchange. The remaining link is the EU dependence on Russian fossil fuels, which accounts for 45 per cent of regional energy needs, but should crumble over time.
The IMF argues such a ‘tectonic shift’ will involve high adjustment costs as supply chains and production networks are reconfigured. The scale of the switch will largely be determined by which side of the divide China chooses to sit.
Beijing’s tacit support for Vladimir Putin’s actions is not encouraging if the tide of Balkanisation for global trade and enterprise is to be halted. Given the seismic scale of what is happening it is hard not to view latest WEO projections with scepticism.
It has lowered the forecast for world output by a modest 1pc over the next two years. Britain will remain among the best performing of the advanced nations with a jump in output this year of 3.7 per cent, a reduction of a full point from January.
That projection doesn’t capture the scale of the tax bombshell, the shift to higher interest rates and the squeeze on real incomes that is only given passing mention.
Several City number crunchers would dispute the IMF’s rose-tinted projections and predict British output slipping into negative territory in the third quarter. Quite a difference.
Tax torrent
After the £400billion splurge on controlling the pandemic, Rishi Sunak’s goal has been to restore sanity to UK public finances.
Putting to one side the contretemps over his spouse Akshata Murty’s revoked non-domicile status, the Chancellor potentially could have taken pride in the UK’s fiscal stringency.
The UK is racing to reduce the burden of government debt from a peak of 95.6 per cent of national output in 2021-22, as measured by the Office for Budget Responsibility, to 83.1 per cent in 2026-27.
With the exception of Germany, which started off in a better place, this gives the UK almost heroic status against a ratio of nearly 125 per cent in the US, 143 per cent in Italy and 114 per cent in France.
Japan’s debt is so off the map at close to 260 per cent that it is in its own solar system.
Fiscal responsibility comes at a horrible price. The last thing households need, as the cost of living tidal wave hits, is the new health and social care levy, a freeze on indexation of tax bands, not to mention the future jump in corporation taxes.
These are wrong taxes at the wrong time.
Nickel trauma
British regulators, in typical slow motion, have yet to report on the mayhem at the London Metal Exchange, when dealings in nickel were suspended at the start of the Ukraine conflict.
The IMF does not spare LME’s blushes. Its Global Stability Report says the result of the Hong Kong-owned LME’s pre-emptive action was to ease pressure on Shanghai-based short-seller Tsingshan Holding Group and shift the burden to long holders including banks, brokers and hedge funds.
The fund fears serious disruption to commodity markets and global finance unless there are early LME reforms on transparency and governance.
Are you listening on Threadneedle Street?
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