Britain is set to outperform the German economy this year, according to the International Monetary Fund (IMF).
The fund said on July 25 that it expected the UK economy to grow by 0.4 percent, as it released its latest annual update on the world economic outlook.
This comes despite a warning in April the UK economy would contract by 0.3 percent.
The fund’s report stated that “This is an upward revision of 0.7 percentage point ... reflecting stronger-than-expected consumption and investment from the confidence effects of falling energy prices.”
Consumer confidence is at its highest peak in eighteen months, according to a separate report released by Pwc on July 25. Inflation also fell further to 7.9 percent in June, from its peak of 11.1 percent in October 2022. As business confidence levels grow, according to the Confederation of British Industry, this economic outlook backdrops a more optimistic fiscal year than previously predicted.
The IMF also pointed towards “lower post-Brexit uncertainty” as a positive indicator, in the wake of the government’s Windsor Framework agreement. It confirmed a move back towards a “resilient financial sector” as previous months of global banking stress (including the collapse of Credit Suisse and Silicon Valley Bank) leave UK institutions relatively intact.
The report’s projections for the German economy now suggest it will shrink by 0.3 percent, with the fund attributing “weakness in manufacturing output” to its poor performance. This comes as the German economy now meets the technical definition of a recession, having contracted for the past two quarters.
This shift steers the UK away from being on target to become the worst-performing major economy this year and relegates Germany to that same position. Following German Chancellor Olaf Schulz’s statement earlier this year that Germany would avoid an economic contraction, the latest predictions will be a disappointment.
The IMF suggested in May that German economic growth will struggle because of international tensions and an ageing population (an economic issue also affecting Britain, as population expert Paul Morland recently stated), as it entered a “new normal.” Its latest findings suggest that these problems are continuing to halt growth.
Problems will persist
Macroeconomist Philip Pilkington told The Epoch Times that, “Germany’s problems are caused by high energy prices eating into its industrial competitiveness.”The European Commission also suggested in its May update that recent disruption in energy supplies is the leading obstacle to overcome for Germany, as it absorbs the “energy price shock.”
Mr. Pilkington further stated that “Unless Germany can get access to cheap energy again it is hard to see how these problems don’t persist.”
In Britain, this latest news defeats the more gloomy economic predictions put forward by Chancellor Jeremy Hunt, in his spring budget, when he cited projections from the Office for Budget Responsibility as predicting a contraction of 0.2 percent in 2023.
The Bank of England governor, Andrew Bailey, told British business leaders in May that as the shock from the energy crisis was wearing off and inflation would likely fall, “second round effects” would continue to persist. In contrast to Mr. Bailey’s calls for a decline in demand for pay increases, lead economist for the IMF, Pierre-Olivier Gourinchas, stated that there is, “room to accommodate a rebound in real wages without triggering a wage-price spiral.”
Nonetheless, Mr. Gourinchas has warned that inflation “remains well above central bank targets,” suggesting that the fight against inflation will continue well into 2025.
Currently sitting at 5.1 percent, inflation is expected by the fund to decline to 3.1 percent in 2024, but Mr. Gourinchas stated, “clearly the battle against inflation is not yet won.”
With British Prime Minister Rishi Sunak pledging in January that his government would “halve inflation” in 2023, this warning on inflation as a persistent issue will come as a setback, while the overall economic mood continues to improve.
