IMF slashes growth forecast as second wave engulfs UK economy

Tim Wallace
·4-min read
Sunak - Jeff J Mitchell/PA
Sunak - Jeff J Mitchell/PA

Britain’s economic recovery is disintegrating as the second wave hits, forcing the International Monetary Fund to abandon forecasts it made just weeks ago and replace them with gloomier projections.

The fund (IMF) fears “persistently higher unemployment” will be the legacy of the crisis and urged Chancellor Rishi Sunak to ramp up spending again to counter the growing threat.

Officials also warned against a full national lockdown, saying that measures targeted by location and industry make more sense now the virus is better understood.

It came as private sector economists warned that the country faces a double dip recession as tighter Covid restrictions send GDP tumbling for the second time this year.

The IMF now expects the economy will shrink by 10.4pc for 2020 as a whole, compared with the 9.8pc predicted in its World Economic Outlook earlier this month.

Next year’s recovery will also be lower than previously hoped as normal life is once again brought to a crashing halt by the second wave.

Kristalina Georgieva, the IMF’s managing director, praised the Government for spending heavily to prop up jobs, incomes and businesses.

But she also called on Rishi Sunak to ramp up spending further, warning that inequalities are mounting and that unemployment may remain high for years to come.

The Government has pumped in more than £200bn of support so far, and the IMF is keen for more despite the bulging deficit and a national debt which has rocketed above 100pc of GDP for the first time since the Sixties.

Ms Georgieva said: “We support an additional fiscal push, centered on public investment and enhancing the safety net. This represents an opportunity to ‘build forward’ and address the UK’s climate targets, reduce regional inequality, and help those who do end up losing their livelihood."

She also called for business loan guarantees to be extended as the pandemic surges back, said the Bank of England should ramp up quantitative easing, and urged policy makers to consider negative interest rates to support the recovery.

Only once the economy is recovering strongly should the Government think about spend cuts or tax hikes to restore a degree of balance to the public finances, she said.

For now, the threat is another recession.

Ms Georgieva said the new anti-Covid measures will have a smaller effect on the economy this time around, compared to the full lockdown in the spring.

She said: "The materialisation of the second wave risk is influencing our projections for the UK. This is why they went slightly down vis a vis where they were just a couple of weeks ago.

“But we are not projecting a dramatic drop of the kind that we had in March.”

This is because the economy is already smaller than it was, with the hospitality industry in particular still struggling to recover; because businesses have learned how to operate with restrictions in place, for instance with bigger digital operations; and because of enormous spending by the Government combined with support from the Bank of England.

However, economists do fear a recession as restrictions tighten.

George Buckley at Nomura expects more regions to be moved into tier 3, hitting those areas and harming the economy.

He predicts a peak-to-trough fall of GDP in this double dip recession of around 3.5pc.

This is far smaller than the drop of more than 25pc in the peak of the first lockdown, but starts from a much worse position, as the economy is still around 10pc smaller now than it was before the pandemic began.

Three-tier Covid lockdown map
Three-tier Covid lockdown map

While Mr Sunak’s support should help preserve jobs, Mr Buckley fears a longer-term decline in employment as businesses struggle to recover.

He said: “The more support the state offers, the longer they can delay this rise in unemployment. But eventually it will not be just the payment of wages which is an issue, it will become that firms will not be able to afford to pay their overheads.

“You cannot just keep on running a business paying say 5pc of your wage costs and all of your other costs as well. So eventually you might just see more businesses go to the wall.”

Martin Beck at Oxford Economics added that repeated lockdowns will sap the economy’s strength.

He said: “The more lockdowns you do, the greater the long-term damage, as firms lose more and more custom and become unviable. It is a ripple effect on the longer-term outlook.”

Mr Sunak welcomed the IMF’s advice.

He said: “Let’s be clear on what the fund are saying today: it’s right to support the economy in the short term but over time, and in line with other major economies, we must get our public finances back on a sustainable path.

“Today’s IMF report is an important moment. They confirm the UK is on the right economic course."