Performance better than expected, fund says as it cuts 2018 outlook and cites Trump protectionism as risk to global economy

The International Monetary Fund has upgraded its forecasts for the UK economy this year after the latest signs that businesses and consumers have shrugged off the Brexit vote.

Unveiling its new forecasts on the eve of a key speech by Theresa May on the Brexit process, the Washington-based fund also cut the outlook for 2018, reflecting widespread uncertainty over Britain’s future outside the EU.

The IMF forecast that the UK will grow by 1.5% this year, up from a previous estimate of 1.1%. However, 2018 expectations were revised down from 1.7% to 1.4%.

Sterling skids to three-month low on hard Brexit concerns Read more

The fund noted that Britain’s terms of exit from the EU were “unsettled”. It listed that uncertainty among a host of risks it sees to the global outlook that also included the potential for a wave of protectionism as Donald Trump takes over the US presidency.

The IMF was forced to accept in October that its prediction of a post-Brexit-vote financial crash had proved to be overly pessimistic. Monday’s upgrade brought it more in line with other forecasters after signs the UK economy grew at a solid pace in the second half of 2016.



The IMF’s economic counsellor, Maurice Obstfeld, included the unknown nature of Britain’s future relationship with the EU in a list of factors contributing to a climate of uncertainty that also included elections in the eurozone, the change of president in the US and geopolitical tensions.

The IMF used an update to its economic forecasts to highlight popular antipathy towards international trade and a widening in the gap between rich and poor. It called on governments to tackle inequality by helping people find work in fast-changing jobs markets shaken up by technology and globalisation.

The IMF made no changes to its October forecast for global economic growth to edge up this year after a sluggish 2016. But it upgraded its outlook for the US on the assumption that more spending under Trump would boost growth. However, it said there was uncertainty around the nature of economic policy under the new administration and how it would impact other economies.

Obstfeld noted signs of widespread frustration around the world at what many feel is an unfair distribution of the fruits of globalisation and economic growth. As policymakers and business leaders gather in Davos for the World Economic Forum, and with inequality top of this year’s agenda, the IMF became the latest in a line of international bodies to call for more shared prosperity.



“Social dislocation due to globalisation and, even more, to technology change is a major challenge that will only intensify in the future. One result has been wider inequality and wage stagnation in many countries,” Obstfeld said, presenting the latest IMF forecasts.

The IMF's world growth forecasts The IMF’s world growth forecasts

He added that a key takeaway from 2016 was that “sustainable growth must also be inclusive growth”.

But at the same time, with nationalist politicians gaining ground in some countries, the IMF warned against moving towards more inward-looking policies.

Without naming Trump, who campaigned on an anti-globalisation platform and with the promise of a big infrastructure drive, the IMF said there was a risk that higher spending could force the US central bank to raise interest rates at a faster pace to contain inflation and that would push up the US dollar. Those currency moves, which would make US exports more expensive and its imports cheaper, risked driving up “protectionist measures and retaliatory responses”, Obstfeld said.

On the other hand, the extra spending in the US was likely to bolster economic growth, and if done in a way that did not stoke inflation it would allow the US Federal Reserve to raise interest rates at a more moderate pace. The IMF sees the US economy growing by 2.3% in 2017 and 2.5% in 2018. That was an upgrade from October’s forecasts for 2.2% for 2017 and 2.1% for 2018.

For the global economy, the IMF saw more scope for growth to disappoint rather than beat expectations. It forecast 3.4% growth this year and 3.6% in 2017. That follows estimated growth of 3.1% in 2016.

“A faster pace of expansion would be especially welcome this year: global growth in 2016 was the weakest since 2008-09, owing to a challenging first half marked initially by turmoil in world financial markets,” said Obstfeld, referring to sharp swings on markets this time last year.

To help shore up growth in 2017, the IMF called on central banks to keep policy “accommodative, relying on unconventional strategies as needed”. It also repeated a call for governments to do their share of the heavy lifting with spending and long-term reforms to make growth more sustainable.