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IMF defends gloomy UK forecast after govt criticism

Forecasts are never perfect given the many factors that affect economic growth – from geopolitics to the weather. But such reports can point in the right direction, especially where they align with other predictions…reports Asian Lite News

The International Monetary Fund has rejected government suggestions that its latest assessment of the UK economy is too gloomy.

The influential global group forecasts the UK will have the highest inflation and slowest growth next year of any G7 economy, falling behind the US, France, Germany, Canada, Italy and Japan.

The Treasury said recent revisions to UK growth had not been factored in to the IMF’s report. But the group denied being pessimistic.

IMF chief economist Pierre Olivier Gourinchas told the BBC: “We’re above the Bank of England estimate [for growth] for next year, so I don’t think we are particularly pessimistic. I think we’re trying to be honest interpreters of the data here.”

Forecasts are never perfect given the many factors that affect economic growth – from geopolitics to the weather. But such reports can point in the right direction, especially where they align with other predictions.

The IMF, an international organisation with 190 member countries, has said the forecasts it makes for growth the following year in most advanced economies have, more often than not, been within about 1.5 percentage points of what actually happens.

In July last year, it forecast that the UK economy would grow by 3.2% in 2022. It revised that upwards to 4.1% at the start of this year.

But official UK figures released last month estimated that the country’s economy expanded by 4.3% in 2022 – considerably more than the IMF’s initial estimate.

According to the group’s latest forecast, which it produces every six months, it expects the UK to grow more quickly than Germany in 2023, keeping the UK out of bottom place for growth among the G7. But it downgraded the UK’s prospects for next year, estimating the economy will grow by 0.6%, making it the slowest growing developed country in 2024 – widely predicted to be a general election year.

The IMF says the UK’s immediate prospects are being weighed down by the need to keep interest rates high to control inflation, which has been falling but remains stubbornly above target. It warned Bank of England rates would peak at 6% and stay around 5% until 2028. Rates are currently 5.25%.

“The decline in [UK] growth reflects tighter monetary policies to curb still-high inflation and lingering impacts of the terms-of-trade shock from high energy prices,” the report said. The IMF’s forecast has come at a bad time for the UK government, which is keen to promote the idea that the economy is at a turning point with inflation falling decisively and interest rates likely to have peaked.

Government sources suggested the IMF had not taken into account the fact that expectations for market interest rates had fallen in recent weeks, and that the Office for National Statistics (ONS) had upgraded its assessment of the UK’s post-pandemic recovery.

He added that a “preliminary read” of the ONS’s revised data had changed the picture for 2021, but “probably not much” for the current forecasts.

“If anything,” he said, past upgrades for 2021 would mean “there is less room to grow and catch up, so it might not lead to a big change upwards in terms of the growth performance.”

Responding to the IMF’s report earlier, Chancellor Jeremy Hunt said: “The IMF has upgraded growth for this year and downgraded it for next – but longer term they say our growth will be higher than France, Germany or Italy.

“To get there we need to deal with inflation and do more to unlock growth.”

On Tuesday, the Bank of England’s Financial Policy Committee (FPC), which monitors the stability of the UK financial system, also warned on the UK’s high interest rates.

It said financial markets expected rates would “have to stay high for a long time”, putting pressure on household finances.

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IMF slashes India’s 2022 growth forecast to 7.4%

The downward revision of India’s growth forecast by the IMF came days after the ADB pared down its growth projection for India to 7.2 per cent for FY23, from 7.5 per cent, citing higher-than-anticipated inflation since April and subsequent monetary tightening by the RBI..reports Asian Lite News

The International Monetary Fund (IMF) on Tuesday slashed India’s growth forecast for 2022-23 (FY23) by 80 basis points to 7.4 per cent, citing less favourable external conditions and rapid policy tightening by the central bank.

In its update to the April World Economic Outlook, the IMF said that though a global recession in 2022 was ruled out with a growth estimate of 3.2 per cent, the balance of risks was squarely to the downside, driven by a wide range of factors that could adversely affect the global economic performance.

“The risk of recession is particularly prominent in 2023, when in several economies growth is expected to bottom out, household savings accumulated during the pandemic will have declined, and even small shocks could cause economies to stall. For example, according to the latest forecasts, the United States will have real GDP growth of only 0.6 per cent in the fourth quarter of 2023 on a year-over-year basis, which will make it increasingly challenging to avoid a recession,” it said.

Pierre-Olivier Gourinchas, chief economist of the IMF, said that in a plausible alternative scenario where risks materialise and inflation rises further, global growth could decline to about 2.6 per cent in 2022.

“The risks to the outlook are overwhelmingly tilted to the downside. The war in Ukraine could lead to a sudden stop of European gas imports from Russia; inflation could be harder to bring down than anticipated either if labour markets are tighter than expected or inflation expectations unanchor; tighter global financial conditions could induce debt distress in emerging market and developing economies; renewed Covid-19 outbreaks and lockdowns as well as a further escalation of the property sector crisis might further suppress Chinese growth; and geopolitical fragmentation could impede global trade and cooperation,” he added.

The downward revision of India’s growth forecast by the IMF came days after the Asian Development Bank pared down its growth projection for India to 7.2 per cent for FY23, from 7.5 per cent, citing higher-than-anticipated inflation since April and subsequent monetary tightening by the Reserve Bank of India (RBI).

India’s inflation remained above the RBI’s upper tolerance limit for a sixth straight month in June. On June 8, the six-member Monetary Policy Committee (MPC) of the RBI raised the repo rate by 50 basis points following an off-cycle rate hike of 40 basis points in May, making it a 90 bps rate hike in just over a month. Analysts expect another rate hike in the MPC meeting on August 5.

The IMF said that in China, further lockdowns and the deepening real estate crisis had led the growth forecast to be revised down by 1.1 percentage points to 3.3 per cent for 2022, with major global spillovers.

“Downgrades for China and the United States, as well as for India, are driving the downward revisions to global growth during 2022–23, which reflect the materialization of downside risks highlighted in the April 2022 World Economic Outlook,” it added.

The multilateral lender said global trade growth in 2022 and 2023 would likely slow to 4.1 per cent in 2022 from 10.1 per cent in 2021, reflecting the decline in global demand and supply chain problems. “The dollar’s appreciation in 2022 — by about 5 per cent in nominal effective terms as of June compared with December 2021 –– is also likely to have slowed world trade growth, considering the dollar’s dominant role in trade invoicing as well as negative financial balance sheet effects on demand and imports in countries with dollar-denominated liabilities,” it added.

As advanced economy central banks raise interest rates to fight inflation, the IMF said widespread capital flight from emerging markets and developing economies could amplify this risk.

On policy priorities for economies, the IMF said that at this juncture, focus should be to bring inflation under control, as price stability was a precondition for durable growth in economic well-being and financial stability. “Economies in which underlying inflation and inflation expectations have risen persistently and significantly above target levels need to take decisive action to tighten monetary policy, with central banks shrinking their balance sheets and raising real interest rates. In the near term, such policies reduce inflation at the cost of lower real activity, higher unemployment, and lower wages,” it added.

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World Bank revises India’s growth forecast to 8.3%

The Bank’s Global Economic Prospects Report said that India would be the second fastest-growing major economy, behind only China which is forecast to grow by 8.5 per cent, reports Arul Louis

The World Bank has forecast that the Indian economy would grow by 8.3 per cent during the current fiscal year, an increase of nearly 3 per cent from its January projection, but lower than the April estimate by almost 2 per cent.

The Bank’s Global Economic Prospects Report released on Tuesday said that India would be the second fastest-growing major economy, behind only China which is forecast to grow by 8.5 per cent.

The report said that India’s growth forecast is “supported by plans for higher spending on infrastructure, rural development, and health, and a stronger-than-expected recovery in services.”

But it added, “Better growth prospects since January, however, masks significant damage to economic activity from Covid-19.”

Economic growth is expected to slow to 7.5 per cent during the next fiscal year as “the economy is expected to follow the same, yet less pronounced, collapse and recovery seen during the first wave,” it said.

In January, the Bank had forecast a growth of India’s gross domestic product (GDP) by 5.4 per cent which is 2.9 per cent less than the latest expectation and in April by 10.1 per cent, which was higher by 1.8 per cent.

The report also moderated the shrinkage in India’s economy to 7.3 per cent in the last fiscal year, less than the 9.6 per cent projected in January.

The report said that reflecting the “rebounds in some major economies,” the global growth in 2021at 5.6 per cent “is expected to reach its strongest post-recession pace in 80 years.”

The Bank projected the global growth to slowdown to 4.3 next year and to 3.1in 2023 as the effect of the rebound from the shrinkage of 3.5 per cent in 2020 wears off.

Overall for South Asia, the Bank said, “Growth is projected to rebound to a stronger-than-expected 6.8 per cent in 2021, partly reflecting momentum from the end of last year.”

India accounts for most of the upgrade for the region “as strong services sector activity more than offsets the economic effects of the worsening pandemic,” it said, adding, “The outlook is underpinned by a rebound in private consumption.”

Pakistan’s economy is expected to grow by only 2 per cent this fiscal year, Bangladesh’s by 5.1 per cent Bhutan by 5 per cent and Nepal by 3.9 per cent, according to the Bank.

The forecasts on a calendar year basis for 2021 is 1 per cent for Afghanistan, 17.1 per cent for the Maldives and 3.4 per cent for Sri Lanka.

The bank, however, warned, “With the recovery in early stages and the pandemic continuing to spread, the outlook is highly uncertain.”

“Downside risks stem from high government debt, upward pressure on food prices, financial sector challenges, and the uncertain trajectory of Covid-19 and vaccination,” it added.

Reflecting a particular risk for India, the Bank said, “Domestic financial sector stress remains a significant downside risk in the region, as nonperforming loans were high prior to the pandemic in the region’s largest economies.”

The Bank’s projection for India is higher than the 7.5 per cent forecast for this calendar year made by the UN’s mid-year World Economic Situation and Prospects report issued last month.

But it is also significantly lower than the International Monetary Fund’s projection of a 12.5 per cent growth rate for the current fiscal year that was made in April before the second wave of the Covid-19 pandemic brutalised India.

IMF’s Chief Economist Gita Gopinath had cautioned at that time that “these numbers precede the current wave of the virus, which is quite concerning.”

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