While the newly elected Labour Prime Minister, Kier Starmer, has been clear on his priorities, with the growth of the economy at the top, there has been a difference in the opinion of the International Monetary Fund (IMF) and some leading economists as well as the former Tory Chancellor, Jeremy Hunt, on the issue of the economy.
The UK economy has received a hefty upgrade from the IMF, but the organisation’s top economist had warned about the possible risks of big policy changes in the recent budget.
Analysts at the fiscal watchdog expect the UK to grow 1.1 per cent in 2024, up from a previous forecast of 0.7 per cent. Among rich economies only Spain received a larger increase. This time last year, the IMF predicted the UK would be the worst-performing economy in 2024, but its latest forecasts put it in line with France and ahead of Germany, Japan and Italy.
The IMF expects growth to pick up to 1.5 per cent next year. It predicted that “falling inflation” and interest rates would stimulate domestic demand. The up grade would have been a boost for the chancellor Rachel Reeves when she was preparing her first Budget, but Pierre-Olivier Gourinchas, the IMF’s chief economist, cautioned that doing “too much too quickly” on tax rises and spending cuts might have an “adverse impact on growth.”
Reeves is reportedly seeking to raise £40bn through a combination of tax hikes and cuts, which many economists have warned risks causing damage to the UK’s growth outlook. Gourinchas had stressed that there was still a need for rich economies “to bring debt levels down”.
He said: “If you are not doing that, that’s when you find yourself potentially later on the mercy of market pressures. That will force an adjustment that is uncontrolled to a large extent, at which point you have very few degrees of freedom. So you don’t want to get in that position.” Reeves had welcomed the forecasts, but stressed there was more work to do” to encourage growth.
The UK economy, however, received a rare downgrade after economists at the EY Item Club, lowered its growth forecast for this year and next. The consultancy predicted that the UK would grow 0.9 per cent this year, down from the 1.1 per cent expansion it projected this summer.
The downgrade for 2025 was larger, with EY anticipating that the economy would grow 1.5 per cent, down from its previous estimate of 2.0 per cent.
EY’s reduction, which came from a higher base, was largely driven by changing assumptions around consumer spending, reflecting the latest estimates of the household savings ratio.
Back in September, the Office for National Statistics had published updated estimates of the savings ratio in the first half of the year, revising down its estimates to 10.0 per cent from 11.1 per cent previously. However, many forecasters, including the IMF and the OECD have bumped up their predictions in recent months reflecting the UK economy’s surprisingly strong start to the year.
Meanwhile, former (Conservative) chancellor Jeremy Hunt, has been critical of the increase in employer national insurance contribution (NIC) in the recent budget. Expecting that Labour was planning to do so he had said that it would be an “absolute disaster” for Britain’s economy as it would dampen growth and investment.
Treasury officials had suggested increasing employer national insurance contributions in 2022 when Hunt was chancellor, following the fallout from Liz Truss’ mini-budget. But he said: “I rejected it because of the damage it would do to business investment and job creation”.
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