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Concerns over Trivial Changes to IMF GDP Forecasts for Britain

By Patrick Higgins  |  24/07/2017 14:38
According to the British economy’s performance in the first quarter of 2017, the IMF has revised Britain's GDP forecast slightly downwards.  Amongst developed countries, Britain has seen the heaviest fall in growth projection, despite Britain still being predicted to perform better than France, Japan and Italy this year.
 
Reacting to the new Q2 data, during which period Britain's economy grew a tiny 0.3% (a paltry improvement on Q1's 0.2% rate), the IMF moved to make forecast adjustments.  Revised downwards from 2% to 1.7%, the decline is a testament to the uncertainty of Brexit, and the effects that the volatility of the pound is having on the average British consumer.  Relatedly, the IMF expects growth to stay steady at 1.8% in 2018
 
In April, the IMF boosted British growth projections, after data garnered from 2016 following the shock Brexit vote showed that the decision to leave the EU had had little effect on the strength of the British economy.  The IMF had expected Britain's economy to tumble due to Brexit unpredictability but was surprised to see such few adverse economic effects. Therefore, it made its April prediction accordingly.  However, fluctuations of the pound have taken their toll.  Though inflation fell in July (from 2.9% to 2.6%), the inflation rate continues to lead wage growth, well below at 1.8%.  British consumers understandably are now wary of the fact that what they can support with their salaries shifts uncontrollably, and this has caused declines in consumer confidence and total spending.  Overall, consumer misgivings have fueled the slowdowns predicted by the IMF immediately following the Brexit vote last June, just a year later than predicted.  We will be following up on the IMF's decision and analysis later this week when the Office of National Statistics releases their Q2 data on Wednesday.
 
Reacting to the subpar performance of the British economy, Chancellor Philip Hammond has urged the Conservative government to push for a favorable transitional deal with the EU, arguing that further instability could damage British growth prospects in the coming years.  A Treasury spokesperson for Chancellor Hammond stated that, "this forecast underscores exactly why our plans to increase productivity and ensure we get the very best deal from the EU, are vitally important”.
 
Again, a prominent member of the British government calls for a ‘smooth' Brexit.  What exactly a ‘smooth' Brexit entails, none can say for sure.  However, it is safe to assume that such a clean EU exit would include provisions allowing Britain greater access to the Common Market, and preserving British business ties to the Continent.  This preservation of connection is especially critical, given the intertwining of business networks within the EU.  In addition to its assessment of the British economy, the IMF has addressed the performances of key Eurozone economies.  Spain is expected to grow 3.1%, up 0.5% from 2.6% previously.  Furthermore, Italy has been revised upwards to 1.3%, Germany to 1.8%, and the Eurozone as a whole to 1.9%.  As the Eurozone puts its debt crises' behind it (Just today Greece has announced it plans to open up government bond purchases for the first time since 2014) Britain quite obviously seeks to be a continual part of this renewed growth, whether it is part of the EU or not.  If this can be achieved is a matter entirely up to the Brexit negotiators, and until a final agreement is reached determining Brexit's severity, both the pound and Britain's economy will continue to be vulnerable to undulations.
 
Surprisingly, the pound is pushing green today, despite the predictions of weak economic growth.  These increases can be tied to happenings with the euro, which fell after both weak German industrial data and cryptic messages from the ECB regarding QE adjustments were published, and the dollar, which increasingly is being seen as a vulnerable investment due to political upheaval in the US.  These developments may further the idea of investors’ that the pound is still a safe investment, especially after seeing inflation decline this month.  The pound is up +0.30% against the dollar, trading at $1.3031, and up +0.49% against the euro, trading at $1.1185.  All data per 2:37 PM BST
 

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