Budget Preview: Chancellor Philip Hammond"s Impossible Task To "Square The UK"s Circle"

At lunchtime today, Philip Hammond will give the weakened Conservative government’s first budget in the new parliament.

Against a likely backdrop of downgrades for the economy from the OBR, the Chancellor will be under immense pressure to provide a sound plan going forward on many issues. As Statista"s Martin Armstrong notes, the NHS has already had its call for an emergency boost of £4 billion rejected, but there will need to be at least some answers to the problems surrounding health and public services funding.

As a new survey by ComRes shows, this topic is one of particular importance to the public, with 67 percent saying that there should be more investment in these services, with a slight majority even saying they would personally be prepared to pay more taxes to enable it.

Clearly, this is a highly significant budget and we would be greatly surprised if it’s considered a success. As we noted yesterday, Reuters columnist and former European economics editor of The Economist, Paul Wallace, believes:

Few British budgets have mattered as much as the one that Philip Hammond will deliver to the House of Commons on Nov. 22. The chancellor of the exchequer must shore up Theresa May’s perilously shaky government ahead of a vital Brexit summit of European leaders in mid-December. At the same time Hammond has to keep a grip on the public finances.

However, it’s worse than that, as the Chancellor is also under pressure from senior members of the Conservative party, never mind UK citizens, to increase spending amid widespread fatigue with austerity. Here is the Financial Times on the stiff challenge Hammond is facing.

UK Chancellor Philip Hammond is under pressure from all sides as he prepares to deliver his second Budget on Wednesday. The first Budget of a new parliament is traditionally the time for chancellors to take bold decisions about taxes and spending. But the economic forecasts are likely to be difficult, public services are under strain, and pro-Brexit MPs are increasingly turning on the chancellor over his support for a “soft Brexit”. If Mr Hammond produces a safety-first Budget, he squanders his opportunity to decisively shape Britain’s future. But boldness risks backfiring, and steering a middle course threatens to satisfy nobody.

The FT notes that the Chancellor’s statement will “serve a cold dish of downgrades for the UK economy” from the independent “Office for Budget Responsibility” (OBR). This year’s growth forecast is expected to be cut from 2.0% to 1.6% and for 2018 from 1.6% to 1.4%. The medium-term forecasts depend on the OBR’s assumptions on productivity growth, which it has already flagged will be cut “significantly”. The FT expects that.

That means growth figures for 2020 and beyond will be closer to 1.5 per cent a year, compared with the 2 per cent that the fiscal watchdog had previously forecast.

Paul Wallace highlighted productivity as Hammond’s biggest problem.

But the gravest challenge he faces is economic: Britain’s persistent productivity blight…

 

Other advanced economies have also experienced setbacks to productivity growth following the financial crisis. Where Britain stands out is in the severity of its reverse. The shortfall in productivity is the main reason real wages are now 4 percent lower than 10 years ago, a potent reason why the leave campaign prevailed in the Brexit referendum.

While public finances look slightly more robust in the near-term, the outlook is deteriorating 3-4 years out, as the  FT explains"

Tax revenues have been stronger than expected this year, alongside lower-than-expected public spending. As a result, this year’s expected public borrowing will fall by about £8bn. The debt burden will begin to fall next year, giving Mr Hammond the opportunity to boast that he has turned the corner on public finances. But good news in the short term disappears towards the end of the forecast horizon, as weaker economic forecasts bear down on projected tax revenues. Before any accounting or tax changes, the deficit forecast in 2020-21 is likely to rise by more than £10bn compared with the March forecast. The government has already said it wants to reduce borrowing to under 2 per cent of national income by 2020-21, but Mr Hammond’s headroom is likely to roughly halve, from £26bn to about £13bn, in that year.

However, he does have one thing up his sleeve…an off-balance sheet accounting gimmick.

The chancellor wants to signal that after a difficult year, things are looking up, with debt falling and Brexit-related uncertainties lifting. To offset bad news in the medium-term public finances, he will use a £5bn-a-year accounting change — by taking housing associations’ borrowing off the government’s books — to free up more money for housing, wages and healthcare.

Affordable housing is a major problem for Hammond and Prime Minister Theresa May. According to the FT:

Fixing the “broken housing market” is the government’s biggest domestic priority. The chancellor wants to make rents more affordable and ease the path to home ownership for younger adults who have deserted the Conservative party in recent elections. Mr Hammond has already set a target of 300,000 new homes per year, but has also insisted there is no “single magic bullet” to solving housing problems.

He will announce a housing package on Wednesday that is likely to include commissioning of new building on public land and funding for local authorities to construct homes. He will also reaffirm the Tories’ promise from last month’s party conference to commit £10bn more of Help to Buy equity loans, and set out plans to lower stamp duty for some first-time buyers. There will be no big reform of planning laws for the “greenbelt” of protected area outside of London, but local authorities could be given more powers for compulsory purchase of land.

In its budget preview, the left-leaning Guardian newspaper highlights the deteriorating outlook for public finances due to the productivity problem.

Lower expectations for the output per worker will have an impact on the gross domestic product, cutting the amount of economic output available for taxation. The Institute for Fiscal Studies reckons the downgrade will contribute to a £20bn black hole in the public finances, limiting Hammond’s spending power if he wants to stick to his pledge to remove the deficit by the mid-2020s. John McDonnell, the Labour shadow chancellor, seized on the October data to argue that seven years of spending cuts had “caused pain and misery for millions with little to show for it”.

As if “Fiscal Phil” Hammond didn’t have enough on his plate, he’s also been lambasted for his gaffe that “there are no unemployed people” in Britain, in a television interview at the weekend. Disliked by the pro-Brexit side of his party, Hammond’s budget speech is being viewed by some as the “make or break” moment of his career. We concur.

Meanwhile, Bloomberg has been doing some sleuthing on budget preparations by government departments and think tanks. It identifies six things to look out for when Philip Hammond stand up in parliament to deliver his speech.

The U.K. budget is usually a mixture of measures that have been heavily trailed in the run-up by various government ministers, with a liberal sprinkling of surprises. In the past six months there have been myriad consultations and papers on everything from the offshore oil to air pollution that hint at possible measures in the works. Bloomberg trawled through that documentation, as well as recent announcements, to identify six areas that are likely to get a mention when Chancellor of the Exchequer Philip Hammond lays out his economic blueprint.

1. Stamp Duty and the Housing Crisis
Prime Minister Theresa May last week pledged that it’s her personal mission to “build more homes, more quickly.” To that end, the budget is likely to include a number of measures to encourage construction and enable younger people to get on the housing ladder. Asked on the BBC on Sunday about whether the home-buying tax known as stamp duty would be cut for younger buyers, Hammond declined to discuss tax matters, but didn’t deny he was looking at the measure.

“We recognize the challenge for young first-time buyers, that in many parts of the country deposits are now very large,” Hammond said. “Nobody is saying we’ve done enough. We must do more. We recognize there’s a challenge there and on Wednesday I shall set out how we intend to address it.”

2. North Sea Oil and Gas
Whilst remaining committed to its climate-change goals, the U.K. is also trying to extract as much value from its waning oil and gas fields in the North Sea. The industry is crucial to the economy in Scotland, which would be grateful for any assistance to a financial lifeline even as it remains angry at the Conservatives for taking it out of the European Union.

At the last budget in March, the government published a “discussion paper” that examined allowing transfers of tax history between buyers and sellers of oil and gas assets -- a measure designed to make it easier to buy and sell the fields, and keep them producing for longer. It would allow buyers to get a tax refund as a result of any costs incurred decommissioning the field at the end of its life.

Hammond told the Sunday Times he’s “looking at” a possible change in the tax rules, which is “the No. 1 ask of my Scottish colleagues.” Even so, he did issue a note of caution, adding that the Treasury needs to ensure the reform “is robust and that we don’t inadvertently create scope for gaming on a grand scale in the tax system."

3. Boosting Research & Development
May on Monday said the government aims to increase public and private research and development spending to 2.4 percent of economic output by 2027, and beyond that to 3 percent. “This could mean about 80 billion pounds ($106 billion) of additional investment in the next decade,” she said.

As part of an announcement the same day linked to her government’s Industrial Strategy -- due to be published next week -- she said that would begin with a commitment for an extra 2.3 billion pounds of investment in the 2021-2022 tax year, taking total public investment to 12.5 billion pounds that year. The government also signaled plans for a 1.7 billion-pound fund focused on improving regional transport links.

4. Shale Wealth Fund
In another measure aimed at boosting the fossil-fuel industry -- in this case by making it more palatable to local communities -- the government promised at the last election to overhaul a pledged fund worth as much as 1 billion pounds to distribute some of the profits from hydraulic fracturing.

The aim is to ensure “a greater percentage of the tax revenues from shale gas directly benefit the communities that host extraction sites.” The government last week responded to a consultation on the issue pledging the fund will initially consist of as much as 10 percent of tax revenues from shale-gas extraction, with proceeds to be spent on projects ranging from play parks for children to improved transport links and restoring historical sites.

5. Air Pollution Tax
Diesel vehicles have become a political football of late. For years, governments ignored evidence that diesel is worse for air quality and encouraged its use because the fuel is less damaging to the climate than gasoline. With air pollution now under the microscope in London in particular, the government published an air-quality plan over the summer and is likely to include measures in the budget designed to help clean up the air in Britain’s cities by encouraging cleaner vehicles.

Possible measures include raising the sales tax on diesel cars, known as vehicle excise duty, or raising taxation on diesel fuel itself, which is currently taxed at the same level as gasoline, at about 58 pence per liter. The government has also said it will consider programs to encourage motorists to trade in their older, more polluting cars, for newer, cleaner ones. Ministers also stepping up efforts to encourage the use of more electric vehicles by supporting the development of batteries and the deployment of charging points.

6. Fund for Start-Ups
In August, the government proposed a new National Investment Fund that would help start-ups access the “patient capital” funding they need to develop into so-called “unicorns” -- innovative companies valued at over $1 billion. A consultation on the proposal closed in September, and Hammond is likely to propose a confirmed plan of action in the budget.

The consultation suggested funding should come from the British Business Bank, replacing the backing currently received from the European Investment Fund. One of the reasons this could get a mention is that the the government is keen to demonstrate that London can attract Big Tech even when it’s no longer in the European Union.

Although the view is hardly unique to this government, a mere 22 percent said that they feel taxpayers" money is currently being spent wisely.

Whether this percentage will go up or down after the Chancellor"s statement today, remains to be seen.

Britain"s Gravest Economic Challenge Isn"t Brexit

Authored by Paul Wallace, op-ed via Reuters.com,

Few British budgets have mattered as much as the one that Philip Hammond will deliver to the House of Commons on Nov. 22.

The chancellor of the exchequer must shore up Theresa May’s perilously shaky government ahead of a vital Brexit summit of European leaders in mid-December. At the same time Hammond has to keep a grip on the public finances.

But the gravest challenge he faces is economic: Britain’s persistent productivity blight.

Productivity – output per hour worked – is the mainspring of economic growth.

In the decade before the financial crisis of 2007-08 productivity was increasing in Britain by just over 2 percent a year, outpacing the average for the other economies of the G7. But since the crisis British performance has been dismal. Although productivity jumped in the third quarter of 2017, prolonged weakness means that it is barely higher than its pre-crisis peak a decade ago. The recovery in GDP has been driven overwhelmingly by more labor input, a source of growth that is running dry – not least since the vote to leave the European Union delivered a message to curb immigration.

Other advanced economies have also experienced setbacks to productivity growth following the financial crisis. Where Britain stands out is in the severity of its reverse. The shortfall in productivity is the main reason real wages are now 4 percent lower than 10 years ago, a potent reason why the leave campaign prevailed in the Brexit referendum.

Productivity is so central to prosperity and to macroeconomic management – by determining how fast the economy can sustainably grow – that a gaggle of economic researchers have been busy in their labs trying to diagnose the now decade-long disease. Early detective work highlighted the impact of the financial crisis itself, which was especially severe in Britain. This held back productivity by throttling bank credit to new potentially fast-growing ventures and by jamming up the usual way in which capital moves from declining to advancing sectors. 

But as the crisis has receded and British banks have become better capitalized this explanation is less convincing. Longer-term forces appear to be in play in Britain and elsewhere. Firms at the technological frontier continue to forge ahead in raising productivity. However, the diffusion of their best practices within economies has slowed. An aging workforce is now acting as a drag. And the contribution to productivity from improved educational attainment is falling.

One reason the productivity setback has been particularly severe in Britain is that its apparently robust performance before the crisis was overstated and unsustainable. Banking activities ballooned on the basis of what turned out to be economically and socially harmful practices such as risky securitizations. Despite making up less than a tenth of the economy, the financial sector has been responsible for nearly a third of the productivity slowdown. Longstanding weaknesses in qualifications and skills have also become more damaging as business becomes more knowledge-based. Over a quarter of British working-age adults perform poorly in numeracy or literacy or both.

Investment is inadequate, too. Although firms have stepped up their capital spending after it collapsed during the recession, they have done much less so than in previous recoveries. Business investment is only 5 percent above its pre-crisis high a decade ago. At a similar stage in the recoveries following recessions at the start of 1980s and of the 1990s it was 63 percent and 30 percent higher than the respective previous peaks.

The reluctance to invest in turn is rooted in a financial and business culture that is especially and perniciously short-termist in Britain. Firms under pressure from the markets are reluctant to make the strategic investments needed to keep productivity moving ahead. And too many British managers are simply not good enough.

Although a definitive diagnosis of the British productivity disease remains elusive there is a surprising degree of consensus about the treatment needed to resuscitate the patient. The chancellor’s to-do list should include steps to tackle congested roads and overcrowded trains, to support the sciences, to foster R&D in the private sector, and to upgrade Britain’s poor skills. Since competition spurs higher productivity as new and smarter firms drive out older and less productive businesses, Hammond needs Britain to be as open an economy as possible.

The remedies make good sense but they will not rescue the chancellor, who has in any case already announced more spending on infrastructure. First, they will take time to be effective. Second, finding more money for austerity-hit public services such as policing and health will add to the pressures on the public finances. And third, Brexit is now contributing to the productivity malaise as businesses respond to corrosive uncertainties by curbing their investment plans and as Britain becomes less open to trade by leaving the EU. Raising taxes is always an option for a cash-strapped chancellor, but it would be highly unpopular − not least in the bitterly divided Conservative party.

When he presents his budget, Hammond can be expected to put a brave face on things. He will point to the fall in the budget deficit from a peak of almost 10 percent of GDP after the financial crisis to 2.3 percent of GDP in the financial year ending in March 2017. But what matters now is the future path of the public finances. Britain’s poor productivity prospects will box the chancellor in because GDP is the tax base and future revenues will be smaller to the extent that output per hour worked continues to stall.   

The harsh reality is that Brexit will blight the public finances by hurting productivity. While Prime Minister May might see Britain’s overriding priority as ensuring that next month’s summit enables the Brexit talks to move on to trade, she’ll have to broaden her focus if she hopes to stay in office long enough to secure a deal that minimizes the damage Brexit is inflicting on the economy.

Can Britain Afford To Be A Hard Power?

Authored by Matthew Jamison via The Strategic Culture Foundation,

Recently the UK Royal Navy and Ministry of Defence unveiled their brand new aircraft carrier HMS Queen Elizabeth at a cost of 3 Billion Pounds. This at a time when UK national finances are under heavy pressure and the country has been experiencing seven years of severe austerity.

It has recently come to light that in true Ministry of Defence fashion (poor project management & wasteful spending, duplication, poor planning, lack of oversight and accountability) the true costs are set to rocket even further for more aircraft needed to be able to land properly on HMS QE. How very British. The decision to go ahead with a brand new and very expensive aircraft carrier for the UK at a time of acute social and economic headwinds has been hailed by some as an exciting new weapon in Britain"s hard power arsenal that will allow Britain to «punch above her weight» in world affairs and global power projection rankings in Jane"s Weekly.

Some however question if Britain can really afford such an expensive project such as a new aircraft carrier when the Prime Minister Theresa May repeatedly said during the recent General Election that there was no magic money tree for nurses, police, firefighters, doctors, in essence all public sector workers – yet there is 1 Billion Pounds for the DUP and 3 Billion Pounds for a new aircraft carrier that perhaps given the cost and the reality of Britain"s position in the world could have been done without. The cost goes to the heart of the politics of reality and a realism that is sorely lacking in British foreign & defence policy. Can the country really afford such an object when 3 Billion Pounds could have been a major boost to a National Health Service under severe strain? Or imagine what 3 Billion Pounds could do to improve social housing? Or 3 Billion Pounds invested in a National Bank dedicated to helping the carers of those suffering from Alzheimer"s and/or Dementia?

The decision to go ahead with the HMS Queen Elizabeth exemplifies everything that is currently wrong and indeed utterly divorced from reality with the current Government. It goes to the heart over the debates surrounding what kind of country Britain really is, wants to be and should be. Is Britain in reality a strong, successful, competent hard military power with an indispensable, irreplaceable military role to play in world affairs as former Prime Minister Tony Blair would have the country believe with his vision of British foreign policy? Or is it a country with some sections of its public and establishment divorced from reality, still living in a bygone imperial era clinging tenaciously to a shameful period of time in British history and politico-cultural-militarist narratives that are just simply false?

Is it in reality a country with tremendous assets mainly within the soft power field of the arts and humanities such as language, culture, entertainment, acting, drama, academia, museums, libraries, sport, music as well as cutting edges in science, technology and engineering. However beyond that sphere of soft power the British have quite a mixed and mediocre record. The British economy is the most unproductive in the G7, one of the most unproductive economies in the OECD. British efficiency and rigour are substandard as is the work ethic to a great degree. Very little proper thought, planning and analysis goes into project management in Britain. The quality of good management and leadership in Britain is sorely lacking whether it be in the political, governmental, economic, or indeed military sphere. Nothing ever really works properly or functions correctly in Britain from its transport infrastructure, customer services, public services etc.

Which brings us back to the decision to build this aircraft carrier at such a huge cost in the first place. What is Britain trying to prove? Why must its Ministry of Defence spend billions upon billions of taxpayers money creating weapons of mass destruction, «boys toys», when there are so many internal problems in the country crying out for social and economic redress. Further more Britain has become a disruptive force in world affairs. It has steadily taken on the role of disruptor in what was seen as the traditional Western Alliance of North America and Europe. At this time of acute international challenges and turbulence in world affairs it is Britain which has become a major contributor to such turbulence and has added to the complexity of the problems facing the international community, not lessened those problems. With this new found role Britain must be treated accordingly. The British have sadly played up to all the worst stereotypes regarding Britain during this period and have demonstrated on a massive scale how unreliable, undependable and two faced they can be. All the brand new, multi-billion pound shiny aircraft carriers (that don"t even properly work once set out to sea) in the world will not be able to gloss over that fundamental truth of regarding the collective, national character.

Perhaps it is time for future British Governments to disabuse themselves of the vanity and pretentiousness that previous British Governments both Labour and Tory have exhibited regarding Britain"s military power. Perhaps it is time to face facts and come to terms with reality. Britain can have a significant role to play within the soft power sphere. But as a hard power, taking part in massive American led military interventions whether it be in Iraq, Afghanistan, Libya and allowing an incompetent and poorly governed Ministry of Defence to continually waste so much taxpayers money as if they had a guaranteed government/taxpayer «Magic Money Tree» must be brought to an end. Furthermore at this time of extreme economic and social challenges that Britain is facing it would be a very wise course of action indeed if Britain were to focus a lot more of its time, resources and energy on putting its own house in order rather than spending vast amounts of money on maintaining a non-essential, non-vital role as a very junior, supporting member of the American Western Alliance.

"Brexit Is A Lose-Lose" - George Soros Slams Brits' "False Hopes" As UK Economy Nears "Tipping Point"

A day after Brexit negotiations officially began, and seemingly unable to get over the result of democracy, George Soros is once again rattling his op-ed sabre, proclaiming the ignorance of British "brexit" voters is about to get its come-uppance...

Economic reality is beginning to catch up with the false hopes of many Britons.

One year ago, when a slim majority voted for the United Kingdom’s withdrawal from the European Union, they believed the promises of the popular press, and of the politicians who backed the Leave campaign, that Brexit would not reduce their living standards. Indeed, in the year since, they have managed to maintain those standards by running up household debt.

This worked for a while, because the increase in household consumption stimulated the economy. But the moment of truth for the UK economy is fast approaching.

Soros said Britain’s eventual exit from the EU will take at least five years to complete, during which the country will probably hold another election.

“If all went well, the two parties may want to remarry even before they have divorced,” he wrote.

Bank of England Governor Mark Carney, in a speech at London’s Mansion House on Tuesday, said domestic inflation pressures remain subdued and signaled he isn’t in a hurry to raise interest rates. In his first major comments in six weeks, he also said he wants to see how the economy responds to the “reality of Brexit negotiations.” However, Soros warns that time"s up...

“We are fast approaching the tipping point that characterizes all unsustainable economic developments,”

“The fact is that Brexit is a lose-lose proposition, harmful both to Britain and the European Union. It cannot be undone, but people can change their minds. Apparently, this is happening.”

If the Brits had just left it all up to him and his elite brethren, everything would be awesome we are sure... and Soros has a final solution...

If May wants to remain in power, she must change her approach to the Brexit negotiations. And there are signs that she is prepared to do so.

By approaching the negotiations in a conciliatory spirit, May could reach an understanding with the EU on the agenda and agree to continue as a member of the single market for a period long enough to carry out all the legal work that will be needed. This would be a great relief to the EU, because it would postpone the evil day when Britain’s absence would create an enormous hole in the EU’s budget. That would be a win-win arrangement.

Simple enough - despite the majority of Brist now in favor of Brexit, you should all shut up and do as your told!

Ring The Alarm: UK Entering Meltdown Mode

Last week, the Office for National Statistics released the inflation results for the British economy. Even though most analysts weren’t expecting any huge differences, the numbers (updated until February) paint a completely different picture. In February, the inflation rate increased rather sharply. On a month-on-month basis, the CPI increased by 0.7% (whereas January was a month with deflation). The current YoY inflation rate based on the CPI is 2.3%.

‘No big deal’, you might think. But in this case it is.

Just one year ago, in February 2016, the annual inflation rate was just 0.3%. This means the inflation rate has almost EIGHTFOLDED in the past year, with a very clear acceleration since October.

Source: RBC, ONS Data

Could it be worse?

Yes, definitely.

Not only does the ONS release an update on the CPI numbers, it also releases a RPI update. That’s the Retail Price Index, which basically measures the cost increase of goods and services. And in February, this index revealed some shocking numbers.

In just one month, the retail prices of a basket of normal goods and services became 1.1% more expensive. When compared to the results of the previous year, the retail inflation rate is in excess of 3%. That’s right, life has become more than 3% more expensive for the average UK citizen!

And this proves how fast and quiet inflation can come back in our lives. Forget about deflation, the only way is up. That’s why the Federal Reserve is hiking the interest rates, and it’s why the ECB has been hinting at a higher benchmark rate as well.

But this might actually cause a huge problem in Great Britain. Not only is the inflation increasing – and will the Bank of England undoubtedly have to increase its interest rates again, the total debt in the United Kingdom is increasing. Fast.

In fact, several politicians and officials have been ringing the alarm bell, as the savings ratio in the United Kingdom hasn’t been this low since the Global Financial Crisis, and in its latest update, the Office of Budget Responsibility (OBR) has confirmed the savings ratio in the UK has now turned negative.

Source: Bank of England

Indeed, the British citizens are spending more than they are earning. This means it won’t be just the government debt level which will increase, but the total amount of household debt will increase as well. The average British household has almost 13,000 GBP in debt (on top of the mortgage) and the Office for National Statistics confirmed the total unsecured debt has increased to almost 350 billion pounds.

This also means the ratio of unsecured debt as a percentage of the average household income has increased to almost 30%, which is once again the highest ratio since the global financial crisis.

Even if you would exclude student debt (although there’s no good reason to do so), the total amount of unsecured debt would be close to 200B GBP, of which 1/3^rd is credit card debt. Meanwhile, the total market share of ultra-long mortgages (30 years or longer) is increasing as well.

Source: Bank of England

That’s a very worrisome situation; the gross and net debt position of the households is increasing whilst the savings ratio continues to drop. And that’s a deathly combination which can’t end well.

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IMF Downplays Trump Stimulus Effect; Slashes Saudi, Mexico Growth In Latest World Economic Outlook

As the world"s elite gather in Davos to decide for the minions what the world should look like, The IMF has taken a far dimmer view of global (and by that we mean Trumpian) economic growth than markets appear to be. In addition to slashing Brazilian, Mexican, and Saudi Arabian economic growth forecasts, Lagarde"s lackeys are taking a cautious stance toward the policies of U.S. President-elect Donald Trump, who takes office this week, assuming only a modest boost to the U.S. economy from his promise of fiscal stimulus.

As Bloomberg reports, The IMF maintained its forecast for global growth in 2017 of 3.4 percent, the Washington-based organization said Monday in a quarterly update to its World Economic Outlook. Expansion for 2018 is forecast at 3.6 percent, also unchanged from the fund’s previous forecast in October.

After a lackluster outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies. However, there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming U.S. administration and its global ramifications. The assumptions underpinning the forecast should be more specific by the time of the April 2017 World Economic Outlook, as more clarity emerges on U.S. policies and their implications for the global economy.

With these caveats, aggregate growth estimates and projections for 2016–18 remain unchanged relative to the October 2016 World Economic Outlook. The outlook for advanced economies has improved for 2017–18, reflecting somewhat stronger activity in the second half of 2016 as well as a projected fiscal stimulus in the United States. Growth prospects have marginally worsened for emerging market and developing economies, where financial conditions have generally tightened. Near-term growth prospects were revised up for China, due to expected policy stimulus, but were revised down for a number of other large economies—most notably India, Brazil, and Mexico.

While the balance of risks is viewed as being to the downside, there are also upside risks to near-term growth. Specifically, global activity could accelerate more strongly if policy stimulus turns out to be larger than currently projected in the United States or China. Notable negative risks to activity include a possible shift toward inward-looking policy platforms and protectionism, a sharper than expected tightening in global financial conditions that could interact with balance sheet weaknesses in parts of the euro area and in some emerging market economies, increased geopolitical tensions, and a more severe slowdown in China.

In a welcome move to Brexiters the IMF hiked its outlook on UK growth, saying "domestic demand held up better than expected in the aftermath of the Brexit vote", but warned that while it was upgrading its outlook on China GDP, it warned that China"s "sugar-rush" growth presents risks to future stability.

The growth forecast for 2017 was revised up for China (to 6.5 percent, 0.3 percentage point above the October forecast) on expectations of continued policy support. However, continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, especially in hardening the budget constraints of state-owned enterprises, raises the risk of a sharper slowdown or a disruptive adjustment. These risks can be exacerbated by capital outflow pressures, especially in a more unsettled external environment.

The full breakdown:

The IMF further notes that the impact of a Trump administration is one of the biggest unknowns facing the global economy.

While Trump has promised to cut taxes and boost infrastructure spending, he’s also threatened to impose tariffs on trade partners such as China and Mexico. Such punitive measures may sap growth if they provoke retaliation. Trump’s policy priorities will become clearer after his inauguration on Jan. 20 in Washington.

The high degree of uncertainty about what’s in store for U.S. economic policy presents a “wider than usual range of upside and down risk factors,” IMF Chief Economist Maurice Obstfeld said in remarks prepared for delivery Monday.

“In light of the U.S. economy’s momentum coming into 2017 and the likely shift in policy mix, we have moderately raised our two-year projections for U.S. growth,” he said. “However, the specifics of future fiscal legislation remain unclear, as do the degree of net increase in government spending and the resulting impacts on aggregate demand, potential output, the Federal deficit, and the dollar.”

The IMF bumped up its forecast for U.S. growth by only 0.1 percentage point this year and 0.4 points for 2018. The U.S. economy will expand by 2.3 percent in 2017 before firming to a 2.5 percent rate in 2018, according to the update.

The Federal Reserve is now expected to raise rates at a less gradual pace than IMF staff projected in October, the fund said, without specifying the number of rate hikes it anticipates this year.

It remains less optimistic on EM nations such as Brazil, Saudi Arabia, and Mexico, however:

• *IMF CUTS BRAZIL 2017 GROWTH OUTLOOK TO 0.2% FROM 0.5%

The International Monetary Fund more than halved its 2017 growth outlook for Brazil, citing weaker-than-expected activity in Latin America’s largest economy.

Brazil will grow 0.2 percent this year, compared with a prior forecast of 0.5 percent, the IMF said in an update of its World Economic Outlook. The fund is now more pessimistic than all but three of the 39 analysts Bloomberg surveyed, whose median forecast is 0.8 percent.

Like most economists, the IMF is tempering its optimism about the government of President Michel Temer. The fund had forecast stagnation for Brazil early last year, but boosted that outlook to a half-point expansion soon after Temer assumed Brazil’s presidency in May.

• *IMF CUTS SAUDI ARABIA 2017 GDP GROWTH FORECAST TO 0.4% FROM 2%

The International Monetary Fund cut its growth outlook for Saudi Arabia on lower oil production, underscoring the challenges facing the kingdom as it seeks to overhaul its economy.

Gross domestic product will expand 0.4 percent in 2017, the lender said in its World Economic Outlook report update on Monday, citing the impact of the recent deal by the Organization of the Petroleum Exporting Countries to reduce output. It compares with the fund’s October prediction of 2 percent, and a median estimate of 0.9 percent in a Bloomberg survey.

The sharply lower forecast comes as Saudi Arabia seeks to build investor confidence in its long-term strategy to reduce dependence on crude and boost non-oil sectors of its economy, while trying to plug one of the Middle East’s biggest budget deficits. The kingdom is planning to borrow as much as $15 billion this year on international debt markets to help fund its spending plans, following last year’s $17.5 billion sovereign bond sale.

• *IMF CUTS MEXICO 2017 GROWTH OUTLOOK TO 1.7% FROM 2.3%

Citing “U.S.-related uncertainty,” the IMF slashed its projection for Mexico’s growth to 1.7 percent this year, down 0.6 percentage point from the October forecast.

Trump has promised to end or renegotiate the North American Free Trade Agreement between the U.S., Canada and Mexico that’s been key to Mexico becoming a manufacturing powerhouse over the past two decades.

Ironically, given the establishment"s devastating forecast pre-Brexit, The IMF has increased its growth outlook for UK... (via The FT)

The International Monetary Fund has upgraded its UK growth forecast for the second time after the Brexit vote as it predicted global economic growth will pick up from its slowest pace since the aftermath of the financial crisis.

In its latest set of economic forecasts, the Washington-based IMF said it now expects the British economy to expand by 1.5 per cent this year from an earlier projection of 1.1 per cent – the biggest single upgrade of any major economy in its January update for 2017.

Growth in 2016 was also nudged up to 2 per cent from an October projection of 1.8 per cent but expansion in 2018 would come in lower at 1.4 per cent from an earlier forecast of 1.8 per cent, said the fund.

It is the latest immediate growth upgrade for the UK since the IMF warned a decision to leave the EU would wreak “severe” damage to Britain’s growth prospects before the June referendum.

The pre-referendum warnings came in for severe criticism from pro-Brexit campaigners, with the fund defending itself by saying it would have been “malpractice” not to have considered worst-case scenarios from a “leave” vote.

The UK economy has broadly defied warnings to continue growing at a healthy clip since the June vote, accelerating to a 0.6 per cent pace in the third quarter. The latest raft of business surveys also point to robust growth at the end of the year, helped along by buoyant consumer spending.

“Domestic demand [has] held up better than expected in the aftermath of the Brexit vote”, said the IMF.

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Full IMF Report below: