There was much panic at a major economic headline this week, which suggested an uncertain financial future for the UK. According to a forecast by the International Monetary Fund (IMF), the UK economy will fare worse than any other country in the developed world in 2023, including Russia. The IMF said that the economy will contract by 0.6% this year, as a result of the cost-of-living crisis, rather than grow slightly as had been previously predicted. The forecast said that the UK is now “on the right track”, and it revised its growth projection for 2023 up from 0.6% to 0.9%.
The reaction across the political spectrum in the country has been broadly as expected. The chancellor Jeremy Hunt said that the UK had outperformed many of the economic forecasts made for 2022, and hinted that he expected it to do the same this year. He already warned that significant tax cuts are unlikely in the forthcoming Spring Budget, because he and the Prime Minister were committed to their plan to lower inflation. The shadow chancellor Rachel Reeves said that the figures showed the country “lagging behind our peers”. Those peers are all expected to grow, according to the IMF – by 0.1% in Germany, 0.7% in France, 1.4% in the US, and more than 5% in China.
Ultimately, the proof will be in what happens – either the IMF’s forecast will be proven correct or not
Why should the IMF have made such a forecast? It blamed the prediction on three key factors – high energy prices linked to the UK’s “high dependence” on liquid natural gas, the rising costs of mortgages, and increased taxes. It also discussed persistent worker shortages, although Brexit was a notable omission. According to the IMF chief economist Pierre-Olivier Gourinchas, the government’s economic strategy (in large part designed to mitigate the impact of the Truss administration’s mini-budget) showed that the UK was “certainly trying to carefully navigate these different challenges”.
Ultimately, the proof will be in what happens – either the IMF’s forecast will be proven correct or not, and I’m not going to claim I know what will eventually transpire. But my idea for this article came after seeing some elements in the news reports that seemed very worthy of comment. The idea of the UK doing worse than sanctions-hit Russia, particularly as the war continues to grind down its economy, was an intriguing prediction, and so I dug a little deeper.
Paul Johnson, the director of the Institute for Fiscal Studies (IFS), noted that the IMF’s forecasts were not always right (a very charitable comment), and that the Bank of England’s predictions were likely to be more positive. Speaking to the Today programme, he said: “My best guess is that the economy will be broadly stagnant this year. That we’re not going to get much in the way of growth but we’re not going to have a deep recession either. Now that’s not great, particularly as we should be bouncing back more strongly from Covid and particularly as we’ve not been growing terribly well for the last decade and more.”
When forecasts meet reality, and unexpected shocks, events and positive developments, they will inevitably be proven wrong
There is a sneaking suspicion that the IMF is particularly harsh on the UK, with its forecasts always and (in some cases, quite significantly) wrong. Since 2016, the IMF has issued 15 forecasts which discussed UK growth, and it underestimated it in every single one – in its January 2021 prediction, it was 3% off the real figure, a huge amount. In 2014, then IMF managing director Christine Lagarde famously issued a statement apologising to the then UK chancellor George Osbourne for their criticisms of austerity, and yet the organisation would make the same comments about other countries and be proven wrong. It is noticeable that, for every other country, the IMF used positive financial news in their growth forecasts for this year, but the UK’s prognosis is essentially a worst-case scenario.
Some financial bodies make so many mistakes on economic predictions, they publish annual examinations of their errors in order to figure out where they went wrong. There’s nothing wrong with that – all forecasts are just forecasts, and nobody is expecting these groups to have crystal balls. When forecasts meet reality, and unexpected shocks, events and positive developments, they will inevitably be proven wrong – that’s the nature of the game. The worry is that forecasters hold sway with policymakers, and consistent negative forecasts may lead to economic policy that is unnecessarily negative.
The economist Julian Jessop notes that this development can be “unhelpful”. He said: “A good example of this was in the wake of the global financial crisis when the IMF came up with some estimates for what impact tighter fiscal policy might have on the economy. Those estimates suggested that austerity would have relatively limited effects on economic growth. Those numbers were taken very seriously by governments, including in the UK, and probably contributed to maybe a bit too much austerity.”
The likelihood that the IMF forecast is exactly right is near zero, and that’s okay. Although it’s the case that the UK is going to face some unpleasant economic issues in the near future (and probably the long term), and that systemic issues are likely fuelling the situation here, it can also be true that the IMF’s view of the nation’s future might be a little unfair. For years, the fund has issued negative predictions for the UK that have been consistently incorrect – based on the state of our nation’s finances, there will be many people hoping that pattern remains.