But the bad news was certainly not confined to the UK. The IMF had a warning for the global economy as a whole, drawing special attention to the adverse impact of uncertainty on growth. The Fund said that worries about the ability of European policymakers to contain the Eurozone crisis are denting growth, as companies hold off on investment and consumers shy away from spending on big-ticket items. This uncertainty is in addition to the effects of austerity, which may be taking a bigger toll on growth than the IMF previously thought. Meanwhile, the hard data continues to disappoint with UK production and trade figures for August looking weak.
IMF downgrades UK growth and fiscal outlook
UK growth projections for 2012 and 2013 were trimmed to -0.4% and +1.1% from +0.2% and +1.4%. The revision would presumably have been even larger had it not been for the introduction of the Funding for Lending Scheme, which was praised by the Fund as an "innovative" measure that should encourage bank lending. The IMF also revealed its updated outlook for the UK's public finances. Unsurprisingly it didn’t make good reading. The UK's deficit is now expected to be 8.2% and 7.3% of GDP in 2012 and 2013 respectively (compared to previous forecasts of 7.9% and 6.6%). The IMF is blaming weak global growth for current consolidation difficulties.
IMF suggests austerity may be hitting growth more than it previously thought
When attempting to determine the impact of austerity on output economists often talk about ‘fiscal multipliers’. For example, if a cut in the deficit has a fiscal multiplier of 0.5 then each £1 cut will reduce output by 50p. The IMF has suggested that fiscal multipliers may have risen from roughly 0.5 in the pre-crisis period to between 0.9 and 1.7 in the post-crisis period. In other words, austerity may be pulling down growth more than it previously thought. The design of ongoing fiscal consolidation efforts may have taken on even greater importance.
Keeping the IMF forecasts in perspective
Hidden beneath the headlines on IMF growth downgrades and warnings were figures that paint a reasonable picture of global growth as a whole over the course of 2012 and 2013. This is because growth in emerging and developing economies is expected to hold up well at 5.5%. In comparison, advanced economies are expected to expand just 1.4% on average both this year and next. This means that the IMF expects global growth to be similar to the average achieved between 1980 and 2011. Not a disaster, all things considered.
UK production and exports disappoint again
UK industrial production fell by 0.5%m/m in August on the back of a significant 1.1% fall in manufacturing and 0.6% fall in the energy supply sector. The figures may be distorted by businesses closing for longer than usual during the summer. August trade figures corroborated the poor performance. UK exports fell by 1.3% during June to August compared to the same period of 2011. The crisis across the Channel didn’t. help. Exports to the Eurozone fell 9% while exports to Italy alone shrank by more than a quarter. Meanwhile, exports to China have risen almost 20% over the past year. Unfortunately China only takes just over 3% of UK exports.
US trade data point to global slowdown
US exports and imports fell in August. Neither fell by much, less than 1% in both cases, and we should bear in mind that trade data are notoriously volatile. Even so this is the fifth month in a row that imports have fallen and adds to the picture of a global economy that, whilst not collapsing, is definitely struggling. The positive for the US is that it enjoys closer ties to Asia with almost 7% of US exports destined for China.
China’s trade rebounds as more favourable base effects kick-in
One positive trade story of the past week was China. Exports grew almost 10%y/y, well ahead of expectations and in US dollar terms the largest ever monthly export total. However, China’s trade growth figures will in the coming months be flattered by weaker exports last year. In other words, trade growth figures may be a little overstated (or benefit from a ‘favourable base’ in economist speak). That said, there are some positives. Exports to the US grew 5%y/y while exports to some of Asia’s faster-growing economies grew over 25%y/y. The problem remains the Eurozone. Exports fell 11%y/y and are down 6% year-to-date. It looks like the IMF’s warning around the impact of uncertainty on growth may be spot-on.