ALEX BRUMMER: The peril of fantasy economic forecasts

Peril of fantasy forecasts: Politicians make poor decisions when they only pick on data that suits their narrative, says ALEX BRUMMER

There is very little joy in the International Monetary Fund’s summer bulletin. Everything has become worse since April.

Global growth is being pulled down by the war in Ukraine and collapsing output in China, where GDP growth shrank from 8.1 per cent in 2021 to a forecast of 3.1 per cent this year. That is a downward revision of 1.1 per cent since April.

As for Britain, the economy is not expected to fall into recession this year and is predicted to grow by 3.2 per cent. Next year the UK could pay the price with output barely expanding at 0.5 per cent.

Slowdown: Global growth is being pulled down by the war on Ukraine and collapsing output in China where GDP growth shrank from 8.1% in 2021 to a forecast of 3.1% this year

The inflation forecasts are equally bleak.

Since 2021 consumer prices have surged far faster than forecast in the World Economic Outlook projections.

It notes that in the UK and US inflation has topped 9 per cent, the highest level in 40 years, and the EU is not far behind at 8.6 per cent.

In emerging markets it has jumped to 9.8 per cent. Taming the cost of living should be first priority for governments.

The aggressive tightening by the US Federal Reserve, which is expected to raise rates today by a further 0.75 percentage point to 2.5 per cent, shows advice is being heeded. 

At the Bank of England, Governor Andrew Bailey let it be known at the Mansion House that a 0.5 percentage point rise is on the cards next week.

Central banks have the ability to adjust to events rapidly using monetary tools. The faster the move to higher rates the more likely it is that consumption is constrained and debt-funded deals in business are halted in their tracks.

A lesson to be drawn from the IMF is the fragility of forecasts.

The fund is constantly revising projections to take account of events such as the gas supply crisis. That is why it is so misleading for politicians to pick on the data that suits their narrative.

Labour is fixated on the idea that an OECD forecast showing the UK as the slowest growing country in the G7 is fact. 

Uncertainty around projections is why it made no sense for the Treasury to pile on the fiscal grief when it had no idea where the economy would be in 2022 and 2023.

The 1.25pc rise in National Insurance contributions for employers and employees, announced in September and imposed in April of this year, was simply ill timed.

Similarly, the jump in corporation tax from 19 per cent to 25 per cent in 2023 was based on the assumption that the UK would still be in a post-Covid expansionary phase.

That is why the plans of PM hopeful Liz Truss to reverse these increases is not fantasy economics. They are the wrong taxes at the wrong time.

The IMF remedy is to focus tax changes on helping the most vulnerable. The former chancellor Rishi Sunak is doing this with his £37billion of giveaways to help with energy bills including a break on the National Insurance rise.

Essentially, he has been forced into U-turns because he acted too precipitately in the name of Treasury orthodoxy.

Some taxes may eventually need to rise and spending trimmed to offset the cost of help for the less well-off. 

The UK is in the fortunate position of having more headroom and less national debt as a percentage of GDP than several competitors.

Beauty spot

Negotiating a world of surging input costs is a challenge for Britain’s leading-edge consumer products group Unilever.

It has chosen to raise prices by 11 per cent but is taking a hit on margins.

The big challenge is selling premium brands when there are cheaper choices.

Chief executive Alan Jope thinks that he has some of the bases covered and points to evidence from India where it has a range of similar products at different price points.

Having lost out in its effort to snaffle GSK offshoot Haleon for £50billion, Jope is now following a ‘bolt-on’ strategy with beauty and personal care the focus of attention.

Prestige beauty brands are into double-digit growth with skincare brand Tatcha recently launched in the UK.

There is up to £2billion in the kitty to spend on promising start-up enterprises each year and an economic downturn could offer opportunities for many more mature purchases.

Ice creams, particularly the Magnum and Cornetto brands, continue to go great guns, and are being boosted by oven-like heat that is scorching both sides of the Atlantic.

Britain’s most woke company is proving a beneficiary from climate change.