The International Monetary Fund (IMF) has this week reduced its growth forecast for the UK following the decline in economic performance since the vote to leave the EU.
The vote to leave the UK left the UK economy relatively unaffected, but latterly the fall in the pound and rise in inflation to almost 3% has caused the downgrade. The IMF World Economic Outlook now expects the UK economy to grow by 1.7% in 2017, not 2%. Growth for 2018 remains unchanged at 1.5%.
The UK wasn’t alone in suffering a growth downgrade as forecast growth for 2017 in the US was cut from 2.3% to 2.1%, and 2018 growth was cut to 2.1% from 2.5%. US growth forecasts were cut because stimulus measures to bolster the US economy have failed to materialise. Should plans be made public or begin, the IMF will review the US downgrade.
Growth projections for many euro-area countries were revised up for this year, including Germany, France, Italy and Spain.
An economist at Fathom Consulting believes there’s a greater than 50% chance of recession in the UK in the next year.
Fund Management Viewpoint
Adrian Frost co manager of the £6.4bn Artemis Income fund, believes the outlook for the UK is fairly negative saying “an important consequence of the recent election is that the outlook for the UK economy has cooled. He added it was never that hot!”
Chris White, head of UK equities at Premier, shares the outlook for the UK economy saying, “given the lack of consensus and clarity surrounding Brexit, the UK’s economic growth will wane, at least on a relative basis compared to other European countries”. White added “it’s difficult to foresee substantial domestic or foreign investment in the UK given the uncertainty and existing overseas investors may reconsider their positions. The economy will get little help from consumers (unless consumer debt rises further) and the government is cautious about increasing expenditure despite the electorate’s concerns about austerity. Whilst this does not mean we are the new ‘sick man of Europe’, we should expect a more fallow period of economic growth over the next couple of years."
Mihir Kapadia Chief executive at Sun Global Investments says “there is again a focus on the debate about the effect of Brexit on the country’s business. While the IMF’s downgrade has been based on ‘tepid performance’, the ultimate impact of Brexit continues to remain unclear. "The key factor which threatens to derail the economy and significantly reduce market confidence is the potential for either the Brexit talks collapsing or reaching stalemate. At the moment, there appears to be negligible progress on the talks and the IMF certainly would have factored the risk of talks stalling in reducing their economic growth forecast.”
The IMF forecast underlined why the government's plans to increase productivity and get "the very best deal with the EU" after Brexit were "vitally important". "Employment is at a record high and the deficit is down by three quarters, showing that the fundamentals of our economy are strong.”
Claire Walsh, of Aspect8, says she never tries to take a view on markets. "My role as an adviser is to look at overall client needs and to encourage a diversified portfolio based on those needs.
”I do not take a view on markets nor do I encourage clients to try to time the market. I do not believe that is the role of an adviser."
Effect on sterling
The pound has remained relatively unaffected.