The International Monetary Fund (IMF) today released its World Economic Outlook, a document that contained both good news and bad.
The good news is for Britain—or more specifically, for the government. The IMF predicts that in 2014, the UK will experience the most rapid economic growth of all the advanced economies. So whereas the US will grow at 1.7 per cent, Germany and France at 1.9 per cent and 0.7 per cent respectively, and Italy at a meagre 0.3 per cent, Britain will grow at a rate of 3.2 per cent.
It’s an extraordinary assessment and one that contrasts sharply with the IMF’s previous prediction that Britain would only grow at 0.4 per cent in 2014.
Elsewhere in the global economy, however, the IMF finds reason for concern. US growth will be a meagre 1.7 per cent, which the IMF attributes to the harsh winter and a contraction in output, although it predicts a return to 3 per cent next year.
More worrying was perhaps the assessment given of China’s economy. The 2014 growth figure of 7.4 per cent appears healthy—but Chinese statistics are always suspect, not least those concerning the economy. The biggest issue for China is whether it can shift from a manufacturing and export-led economic model to one based more on domestic consumption. For this to happen, China must create internal markets: demand for products and services. But this isn’t happening. The IMF says that domestic Chinese demand has “moderated more than expected,” so far this year, meaning that the Chinese economy is heading in precisely the opposite direction to that intended by the Politburo.
Another problem identified by the report was the Russian economy, in which economic activity “decelerated sharply,” due to geopolitical tensions. Russian economic growth is projected to be a miserable 0.2 per cent in 2014.
So—top of the class for the UK economy? No. Not quite. A second report was also released today, this one by the Resolution Foundation. Entitled “Hangover Cure”, it is a close examination of perhaps the most worrying economic quandary facing Britain today, and one dealt with before on this blog—interest rates and the question of what happens when the Bank of England decides to raise them.
Since the financial crisis, the Bank of England, which sets interest rates, has maintained a policy of super-low interest rates, meaning that banks have loaned money cheaply on the high street. But if as the IMF suggests, growth has now returned in Britain to a healthy 3.2 per cent, then the possibility of a rate rise is drawing near. When that happens mortgage holders who borrowed cheap will find those home loans becoming suddenly more expensive.
The Resolution paper finds that a return to normal, higher interest rates “has the potential to roughly double the number of households facing some form of repayment problem by 2018.” In addition, the number of mortgage holders spending more than a third of after tax income on repayments will rise from 1.1m to 2.3m; and the number of households handing over more than 50 per cent of income to the mortgage provider will rise to 1.1m. The paper recommends intervention, regulatory reform and advice to “at risk” borrowers, who are concentrated at the middle and lower-end of the pay scale.
If large numbers of homes experience this sort of pressure then it will increase the likelihood of defaults and pile pressure on the housing benefits bill. It will also exert a downward pressure on demand and consumer spending: people spending more on their mortgage have less to spend on the high street.
These IMF and Resolution reports, when combined, lead to a somewhat paradoxical conclusion. Britain’s economy is recovering and growing fast. But the very extent of that growth may hasten an increase in interest rates, which will in turn cause substantial, mass problems for borrowers. Success, in other words, risks bringing on failure—a vexing conclusion for Ministers to ponder as they set off for summer recess.
