IMF upgrades UK to 2.4% growth this year. But Towry warns this may be ‘catch up’ and not a sustainable upward trend

21st January 2014

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The IMF has revised UK growth upwards predicting that the economy will grow by 2.4% in 2014 from its previous forecast of 1.9% last October.

It expects UK growth in 2015 to be 2.2%. The UK had the biggest upgrade of all the G7 countries. The IMF has also raised it global growth outlook to 3.7%. The outlook for the US has been upgraded by 2.8% this year up from 2.6%. China has been upgraded from 7.2% to 7.5%.

The eurozone however is expected to grow by a mere 1% with some troubled southern European countries and France struggling to recover. The IMF has warned that there is a one in five chance of deflation in the Eurozone. Globally it is much more optimistic.

IMF chief economist Olivier Blanchard said: “The brakes to the recovery are progressively being loosened. The drag from fiscal consolidation is diminishing. The financial system is slowly healing. Uncertainty is decreasing.”

But some experts said that now we may be getting too optimistic.

Andrew Wilson, head of investment at Towry said: “The UK economy is experiencing a catch-up in growth rates, although it is only making up for some of the previous poor performance during and immediately after the financial crisis.

“Growth should shortly revert towards a trend rate of just 1 to 1.5% per annum. Persistently higher growth than this would likely be due to inflation, albeit less so if sterling continues to perform in such a robust manner.

“The IMF has somewhat misinterpreted the UK economy up to this point, and generally it is behind the curve, hence the need for this revision now. It may be that, after the UK economy did better than many expected in 2013, consensus opinion may instead prove too optimistic for 2014. The economy remains unbalanced and vulnerable, and will likely slow down in the second half of the year rather than increasing its rate of expansion. At the same time, inflation should be picking up towards 3%. These two events might surprise financial markets, and cause fluctuations in asset prices.

“So, overall, this is not the time for investors, consumers, or politicians to be counting any chickens. The current pace of economic growth is far more likely to represent a period of catch-up, rather than a new and sustainable upward trend.”

 

 

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