Economics Weekly - A word of advice

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Economics Weekly - A word of advice

The International Monetary Fund’s verdict on the world economy is keenly anticipated as a global health-check, even if its forecasting record is no better than anyone else’s. The forecasts are accompanied by advice, which this time focused on boosting infrastructure investment and urging the European Central Bank to do more.

Economic Analysis

13 October 2014


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The IMF expects the UK to grow by 2.7% in 2015, down from more than 3% this year, but still decent. Among the major economies, only the US is expected to grow faster. The IMF says UK growth has become more balanced – both consumption and business investment are chipping-in – and puts that down to improving credit and financial market conditions and healthy corporate balance sheets. It reckons interest rates will start rising in the first half of next year.


The IMF’s forecasts for the euro area make for grim reading. It says, “the crisis legacy brakes will ease only slowly in the euro area.” That’s IMF-speak for very slow growth for some time to come. It estimates that there is around a one-in-three chance that there will be outright deflation in the region in the next year and an even higher probability of a return to recession. Both would make dealing with heavy debt burdens harder still. The case for more trenchant action by the European Central Bank grows by the day.

The age of austerity

The IMF’s projections for government debt and deficits don't make for encouraging reading either. The world's advanced economies are expected to run deficits of 3.9% and 3.1% of GDP this year and next. That shortfall of taxes relative to government expenditure is lower than its worst point of 9% in 2009, but on current plans there'll still be a third of the work still to go even six years after the crisis. Running deficits year after year means debts build up, in the UK's case to an expected 85% of GDP in 2015. On the IMF's calculations this will put us 11% points higher than the advanced economy average. Back in 2008 we were comfortably below average. Restoring that situation will extend the age of austerity even further.

Strong growth in UK manufacturing

We get the first estimate of Q3 GDP at the end of next week, but the industrial output data for August gave us some clues of what to expect. Overall production was 2.5% higher than at the same point last year, a good performance, but slower than the 3.4% managed by the services sector in the 12 months to July. Manufacturing is the star performer with output up 3.9% in the last year, but some other areas of industry have struggled. Oil & gas extraction has shrunk by 7% in the last year and is now half its 2007 size.


The UK housing market is expected to cool somewhat, although prices are still expected to grow. According to the latest RICS survey, surveyors expect prices to be around 2% higher in a year's time, well below this year’s growth. Expectations for London are that prices will start to fall within the next 12 months - in this respect, the capital is unique among its regional peers. This is mainly due to a sharp fall in the amount of new buyer enquiries. But all is not lost - demand for housing in the capital remains robust. Tenant demand in London is rising faster than anywhere else in the UK.

Europe worries America...

It’s more than its fate at the hands of Europe’s golfers that’s making the US uncomfortable. Minutes of last month’s Fed meeting confirmed that it expects moderate growth to continue. But it’s worried about risks that might visit US shores from overseas. At the moment the biggest risk appears to be the Eurozone’s slide towards recession. Such a move would delay the Fed’s timetable for tightening and leaves them in no rush to raise rates now.

...and the MPC

If the US is worried about the Eurozone outlook then the UK has even more cause to be. The UK’s Monetary Policy Committee kept rates on hold last week and we’ll have to wait till next week to see what was discussed, but the Eurozone’s deteriorating outlook will have undoubtedly been an important topic. At the last meeting two members thought the time was right to start raising rates, but they will have had a hard job convincing their fellow committee members of the need to tighten policy as others, including the Chancellor and the IMF, queue up to warn of European recession.

Happy birthday!

Help to Buy's mortgage guarantee scheme celebrated its first birthday in style. First, the Bank of England gave it a clean bill of health, saying that the scheme was not a significant threat to financial stability. Second - there is ample evidence that the scheme has done what it said on the tin. It has helped 18.5k households buy their first home, compared to the 30k purchases thus far enabled by the older equity loan scheme. 79% of purchases were by first time buyers. And the majority (74%) have been outside of London and the South of England. For a policy born amidst a storm of strong opinions, that’s a good first year. 

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