The Midday Market report is a new newsletter from City AM, giving you fresh analysis on the biggest stories in the City straight into your inbox every lunchtime. Today, Ali Lyon weighs up what Tuesday’s IMF report says about the state of the UK economy. Sign up to the City AM News Updates newsletter here.
To read this morning’s World Economic Outlook from the IMF is to be left confused about the state of the UK economy.
The dollops of good news – and there certainly were a few – were without fail accompanied by caveats and qualifications. Where we were singled out for praise, economists from the pre-eminent monetary authority quickly brought us back down to earth with a thud.
We are – if you’ll allow me to lean on a rather tortured analogy – in the top quartile of our class. Our academic performance – 1.3 per cent GDP growth this year and 1.2 per cent next – is solid if by no means remarkable. And our behaviour – a promise to balance the books (excluding investment) by the end of the parliament – is positively gold-star worthy.
But that good end of term report is made a lot less impressive when one considers that almost everyone else in the class is, by the IMF’s reckoning, on the brink of being put in special measures. And that the teachers’ comments for us left quite a bit of room for improvement.
It was a paper teeming with interesting and politically dicey contradictions. One long do-you-want-the-good-news-or-the-bad-news assessment. But there were three big paradoxes that are worth singling out.
The Great British Paradox in the UK economy
Growth – but make it hot:
Let’s tackle the two big-ticket items up top. We are on course to have the second-fastest growth of any major European economy both this year and in 2027. Given that the IMF’s last global economic temperature check warned we were especially exposed to the then-nascent Iran war, those real GDP numbers can be chalked up as a success. We have proven to be much more resilient than many expected.
But while we’re all enjoying the spoils of our economic unexceptionality, we will also be fighting to contain the second-highest inflation of any developed economy, the IMF warned.
Prices will rise by an average of 3.3 per cent this year, and are on track to jump by a further 2.8 per cent in 2027, assuming the Middle East war dies down by around March, as the report’s authors have.
In short, the UK is looking relatively growth-y. But our exposure to external events – be that via our poor food security, our ideological energy system or our embarrassment of hyper-regulated industries – means we’ll have to get used to higher prices for longer than our counterparts.
Our fiscal position is better than most – but vulnerable to slippage:
Authors singled the UK out for its ambitious deficit reduction targets, which are the most ambitious and impressive of any G7 economy. Speaking at a press conference, IMF chief economist Silvana Tenreyro praised our “consolidation path”, which official targets say will see us bring tax revenue back in line with day-to-day spending by 2029/30. That is considerably lower than the yawning deficits on show in countries like France and the US, which were both placed firmly on the IMF’s naughty step.
But she also raised a gentle eyebrow as to just how realistic our goals are given the rather expensive-sounding mood music coming out of 10 (if not 11) Downing Street. “The message for the UK is simply: stay the course,” Tenreyro said. “And continue on that trajectory.”
Bifurc-AI-tion in the UK economy
As one would expect, AI, and how it will uproot the global economy, was a theme throughout the IMF’s big barometer. The technology’s rapid development helps explain much of why the Middle East conflict has not taken an even larger chunk out of countries’ GDP figures. That is particularly the case in the UK economy, where our abundance of white-collar, professional industries allows us to adopt AI – and its economic uplift – faster than many others.
The kicker (there was always going to be one, wasn’t there) is that once that initial adoption is over, we are among the most exposed of any developed country to its disruptive impact. Our high energy costs preclude us from developing frontier models here almost entirely. We can’t point to any meaningful cottage industries – be they chipmakers, designers and the like – to boost our enormous trade deficit. And, most disconcertingly, there is the small issue of what happens if all those white-collar workers who are currently leaning on the tech for their productivity are suddenly not needed at all.
That worrying notion notwithstanding, there are plenty of positives to take from our bi-annual MOT from the world’s monetary authority. If it really were a report card, it would likely read, “Some good work done this term by the UK economy – but come 28 October, it can’t afford to let itself down at its first big exam.”