Reeves welcomes IMF’s improved growth forecast

In an interview with representatives from the International Monetary Fund (IMF), the organization announced a brighter outlook for the UK economy, projecting a growth rate of 1.1% for the year, an increase from the previous forecast of 0.7%. This shift, while still modest compared to historic averages, positions the UK among the mid-tier of global economies.

Chancellor Rachel Reeves expressed her appreciation for the IMF’s optimistic prediction, yet acknowledged, “I know there is more work to do.” Her comments come in light of a recent claim that the Labour party has inherited “the worst set of circumstances since the Second World War” after 14 years of Conservative governance.

As the Budget approaches, Reeves is expected to unveil plans for tax increases and spending cuts aimed at generating £40 billion. This comes amid disagreements between the IMF and the UK government, as economic forecasts can vary significantly and are often imprecise. Historically, the IMF’s predictions for advanced economies like the UK’s have typically been within 1.5 percentage points of actual outcomes.

The IMF also highlighted resilience in the global economy, noting that wealthier nations have largely recovered from pandemic-induced growth losses. The United States, in particular, is set to lead the pack in the G7, with projections of 2.8% growth this year and 2.2% next year, fueled by gains in productivity and significant immigration flows that have eased labor market pressures.

Contrastingly, major European economies, particularly Germany, continue to show sluggish growth, while Spain is experiencing a robust increase with a projected growth of 2.9% this year and 2.1% next year.

Antecedent to what is expected to be a rigorous Budget, the IMF supports the idea of maintaining and potentially increasing public investment as a strategy for fostering growth. This investment, particularly in sectors that enhance productivity and competitiveness, such as digital and public infrastructure, is deemed beneficial, according to the IMF’s internal research.

With a focus on reevaluating government spending strategies, Reeves is anticipated to announce modifications to how the government defines its rules around national debt reduction to allow for increased infrastructure investments.

While the IMF raised concerns about emerging economies facing “permanent scars” and persistent inflation from recent global crises, Russia’s economy, despite sanctions, received another upgrade in its growth forecast, now expected to expand by 3.6% this year due to its transition to a war economy. However, projections for next year suggest a steep decline to 1.3% as private consumption and investment are expected to slow.

In a statement during the IMF meeting in Washington, Treasury Secretary Janet Yellen confirmed that the US would introduce “strong new sanctions targeting those facilitating the Kremlin’s war machine,” aiming at individuals supplying critical military resources to Russia. The US has taken a range of actions against Russia since the invasion of Ukraine in February 2022, which includes curtailing financial transactions with sanctioned entities and imposing restrictions on technology supplies like microchips and drones.