UK to outperform other big economies with 2.9% growth, IMF predicts

http://www.theguardian.com/business/2014/apr/08/uk-economy-growth-outperform-imf

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Britain will be the best performing of the world's major economies this year with growth of 2.9%, according to the International Monetary Fund, as consumer spending rebounds, inflation remains low and unemployment continues to fall steadily.

But the Washington-based thinktank, which also acts as a lender of last resort to bankrupt countries, warned that the UK's recovery relied too heavily on easy credit, while business investment and exports remained weak.

In its world economic outlook, published ahead of its spring conference in Washington, the IMF said steady growth in the US and the recent sharp turnaround in the UK's fortunes would benefit the global economy.

However, the IMF's chief economist, Olivier Blanchard, warned that income inequality was hurting many countries and becoming an important factor undermining the prospect for sustainable global growth. In his foreword to the WEO, Blanchard said "as the effects of the financial crisis slowly diminish, another trend may come to dominate the scene, namely, increased income inequality".

Without pointing the finger at individual nations, he said a growing income and wealth divide was a longer-term problem for many nations, and not just those at the higher income scale. "Though inequality has always been perceived to be a central issue, until recently it was not believed to have major implications for macroeconomic developments," he said. "This belief is increasingly called into question. How inequality affects both the macroeconomy and the design of macroeconomic policy will likely be increasingly important items on our agenda."

His comments are likely to be leaped on by Labour, which has strongly argued that the coalition's policies have failed to raise basic wages, forcing ordinary workers to borrow to maintain their standard of living.

The US and Britain will be among a leading pack of nations to generate growth in the coming year as the emerging economies of Asia, Africa and South America, which have driven global growth over the last decade, suffer a slowdown.

Global growth is projected to strengthen from 3% in 2013 to 3.6% this year and 3.9% in 2015, broadly in line with the IMF's 2013 outlook. Low interest rates and a reduction in the pace of public sector spending cuts, especially in Europe, were cited as two of the main reasons for a one percentage point increase in growth across advanced economies, countering a trend for slowing growth across emerging markets.

After several years in which the IMF has helped to bail out Greece, Portugal and Ireland and come to the rescue of Ukraine, it said the outlook was stronger than at any time since the 2008 crash. But Blanchard said there were many traps waiting for the unwary and complacent policymaker who failed to consider the possibility of further shocks to the global economy.

Against a backdrop of rising tensions in Ukraine, volatile stock markets and the possibility of sharp rises in interest rates, especially in the US, the world economy could be knocked off its path to recovery.

"Acute risks have decreased but risks have not disappeared," he said. "In the US, the recovery seems solidly grounded. In Japan, Abenomics still needs to translate into stronger domestic private demand for the recovery to be sustained.

"Adjustment in the south of Europe cannot be taken for granted, especially if euro-wide inflation is low. Financial reform is incomplete, and the financial system remains at risk. Geopolitical risks have arisen, although they have not yet had global macro-economic repercussions."

Blanchard upset George Osborne and Angela Merkel in 2011 when he argued that austerity cuts were hitting growth harder than originally estimated. Britain's growth is forecast to reach 2.9% this year before slowing to 2.5% in 2015 while the US is on course to reach 2.8% growth this year and 3% in 2015.

"Growth has rebounded more strongly than anticipated in the United Kingdom on easier credit conditions and increased confidence," the IMF said. "However, the recovery has been unbalanced, with business investment and exports still disappointing."