IMF set to upgrade UK growth forecasts as global economy expands

Forecast growth of 1.9% this year expected to be raised to 2.4% with IMF chief Christine Lagarde declaring 'optimism is in the air'

The International Monetary Fund is widely expected to raise its outlook for the UK on Tuesday, pushing up the country's growth forecasts by more than for any other major economy.

The Washington-based fund has been a critic of the UK's over-dependence on consumers as well as the government's Help to Buy housing market scheme. But it will bring a welcome boost to chancellor George Osborne when it updates its World Economic Outlook from last October's forecasts.

Back then it predicted UK national output would rise 1.9% in 2014 but is now expected to predict growth of 2.4%, according to a Sky News report. The IMF said it did not comment on leaks.

The fund is also expected to upgrade its outlook for the global economy, which in October it said would expand by 3.6% this year. That would reflect the cautiously optimistic tone in a New Year's speech from its managing director, Christine Lagarde, last week.

"This crisis still lingers. Yet optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous … the year in which the seven weak years, economically speaking, slide into seven strong years," she said.

If confirmed, the substantial upgrade to the UK is likely to be seized on by Osborne as further proof the coalition's "economic plan is working" – an oft-used phrase in recent weeks as indicators have largely pointed to growth picking up.

The fund has in the past been highly critical of the coalition's austerity drive. In a damning indictment of the British chancellor's economic policies last year, the IMF's chief economist Olivier Blanchard warned Osborne would be "playing with fire" unless he eased the pace of budget cuts.

The IMF has also echoed other economists, including experts at the UK's own Office for Budget Responsibility, who said that the UK remains over-dependent on debt-fulled household spending to grow.

The latest crop of official data underscored those concerns, with weaker outturns for construction and manufacturing and a jump in Christmas retail sales.

Economists generally feel, however, that overall growth will pick up this year and the IMF is just the latest of a string of forecasters to raise the UK's outlook.

The business group CBI has pencilled in 2014 growth of 2.4%, the British Chambers of Commerce expects 2.7% and the OBR forecasts 2.4%.

A report from EY Item Club on Monday forecast UK economic growth would pick up to 2.7% this year from 1.9% in 2013. It too warned the recovery was not built on solid foundations, however, due largely to the pressure on household incomes.

Peter Spencer, chief economic adviser to the EY ITEM Club said: "It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time. The weakness of real earnings is proving to be the government's Achilles heel and could prove to be the weak spot in the recovery.

"Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio."

There have also been warnings that the recovery is not being felt throughout the UK, and is instead largely benefiting London and the south-east.

A study by the TUC trade unions group on Monday said the recent recovery in jobs had failed to reach the north-east, the north-west, Wales and the south-west, leaving them in the same situation or worse at providing jobs than they were 20 years ago.

The overall unemployment rate for the UK has been coming down faster than policymakers and most other forecasters had expected. Official data on Wednesday are expected to give a jobless rate of 7.3% for November, down from 7.4% the previous month.

Many economists expect the continuing drop in unemployment will prompt the Bank of England to tweak its forward guidance. At the moment, the BoE's guidance is that, barring various exceptions, it will not consider raising interest rates from their current 0.5% until a threshold of 7% unemployment is reached. The Bank may well lower that threshold for considering a hike to 6.5% unemployment, economists say.

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Youth unemployment could prolong eurozone crisis, Christine Lagarde says

IMF chief warns against prematurely declaring an end to the economic crisis, saying joblessness puts future growth at stake

Christine Lagarde, the managing director of the International Monetary Fund, has warned that long-term prospects for eurozone growth look bleak unless politicians act urgently to stoke domestic demand and tackle youth unemployment.

After months of relative calm in financial markets, and with Ireland due to end its painful bailout programme and its reliance on the IMF this weekend, some European politicians have declared the worst to be over for the 17-member single currency zone.

But speaking at the European Economic and Social Committee in Brussels, Lagarde warned against prematurely declaring an end to the economic crisis.

"Can a crisis really be over when 12% of the labour force is without a job? When unemployment among the youth is in very high double digits, reaching more than 50% in Greece and Spain? And when there is no sign that it is becoming easier for people to pay down their debts?"

She warned that high youth unemployment could jeopardise the economy's ability to grow in the future, by creating a generation of young people without the skills to take their place in the jobs market. "What is at stake is Europe's potential for growth in the future," she said.

"Unemployment at a young age means a lack of on-the-job training, depreciating skills, and possible withdrawal from the labour market. Experience tells us that long spells of unemployment lead to a less productive workforce down the road."

Lagarde called for a raft of reforms, including fixing the battered banking sector to "jump-start growth", and warned that with monetary policy all but exhausted, and interest rates already close to zero, governments might yet need to resort to a new fiscal stimulus if recovery fails to take hold.

"In the event growth is low for a protracted period of time and monetary policy options are depleted, fiscal policy will need to provide more support to domestic demand," she said.

In a veiled criticism of Germany, which has tended to rely on an export-led growth model, Lagarde suggested that boosting Europe's growth potential will require stoking demand at home too.

"Most of the demand for European goods and services comes from abroad, not from within, leaving the economy at the mercy of the ups and downs of global trade. European demand for European products remains lacklustre."

After European Central Bank president Mario Draghi unexpectedly announced a cut in interest rates last month to stave off deflation, Lagarde called for the ECB to "keep interest rates low and convince investors that it will do so for as long as is necessary".

The IMF would also like to see a series of labour market reforms, including making it easier for skilled employees to cross Europe's borders in search of work; cutting employment regulation; and shifting the burden of taxation from income on to consumption, in the hope of boosting future job prospects.

"There can be no letting up on reforms until growth has recovered sufficiently to arrest the rise in unemployment and debt," Lagarde said.

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IMF piles pressure on US to reconcile differences and prevent debt default

Shares and oil prices rise in hope of six-week extension as OECD warns US deadlock threatens world economy

Shares and oil prices rose strongly on Thursday amid hopes that policymakers in Washington were buckling under the global pressure for them to settle their differences and prevent a US debt default.

The International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) both issued sharply worded warnings to Republicans and Democrats amid signs that America's Asian creditors were becoming alarmed at the potential consequences of the impasse.

Reports in Washington that the Republicans would agree to a six-week extension of the debt ceiling from next week's 17 October deadline led to a 323-point rise in the Dow Jones average. Brent crude was up by $2 a barrel and the FTSE rose by 92 points as the Republican leader in the House of Representatives John Boehner said it was time for meaningful talks with President Barack Obama.

After discussions with Republican leaders on Thursday night, the White House said Obama had held a "good meeting" but that they failed to reach an agreement to end the budget crisis despite earlier hopes that a deal may be in sight. Ninety-minute discussions between Obama and Boehner broke up with little apparent progress or press announcement, although there was a marked change in tone on both sides that suggested a deal may still be close.

Speculation about a deal had emerged after Jack Lew, the US Treasury secretary, said there would be chaos if the US defaulted – a message rammed home by IMF managing director Christine Lagarde and the OECD's secretary general Ángel Gurría.

Lagarde said there would be very dangerous consequences for the US economy and elsewhere if the default was not prevented.

She distanced herself from the infighting in Washington, noting: "The IMF does not make recommendations about how, politically, this can be resolved. We don't take a political view. We just look at the economic consequences.

"When it affects the largest economy in the world, we are bound not only to look at the immediate domestic consequences but at what happens elsewhere, so that we can have a dialogue with our members to help them prepare.

"I hope we will be able to look back in a few weeks and say what a waste of time that was. But we have to look at the risks no matter how unlikely they are to materialise."

Lagarde said there were two channels through which a debt default in the US would spread to the rest of the world. "One would be the trade channel, caused by a reduction in economic activity in the US from the third quarter onwards.

"The second would be the financial channel – the result of uncertainty and material issues. We are likely to see volatility, uncertainty and consequences for the rest of the world."

Lagarde said some of the warning signs of stress in financial markets – such as the VIX index of volatility and the price of insuring financial instruments – were flashing. "It's not helping the US to have this uncertainty and protracted way of dealing with fiscal and debt issues."

Gurría said: "The current political deadlock in the US is needlessly putting at risk the stability and growth not only of the US but also the world economy."

He added there was a risk that the west could be plunged back into recession by a default. "If the debt ceiling is not raised – or, better still, abolished – our calculations suggest that the OECD region as a whole will be pushed back into recession next year, and emerging economies will experience a sharp slowdown. The magnitude of further possible negative feedback effects can only be guessed at."

The ongoing political impasse in Washington has sparked fears the US could default on repayments of its bonds, prompting banks and clearing houses to take preventative measures against such an unprecedented event.

In Hong Kong, the body which stands behind trades on the Hong Kong futures and options exchanges has concluded that some US Treasury bonds posted as collateral are more risky than in the past.

The US government needs to be able raise the nation's $16.7tn (£10.5tn) debt ceiling on 17 October otherwise it might not be able to make payments on bonds it has issued in the past, unleashing turmoil in the financial markets. About $120bn of debt needs to be repaid that day with another $200bn before the end of the month.

"Participants should make necessary funding arrangements to cover any shortfall to their margin requirements resulting from the increase in the US Treasuries haircut [discount]," the clearing house, Hong Kong Exchanges & Clearing, said.Neil Shearing, chief emerging markets economist, at Capital Economics said: "This is uncharted territory. Depending on the scale of default and the response of policymakers, regulators and the ratings agencies, substantial financial market dislocation could follow."

Article Source : http://www.guardian.co.uk

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