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Newsletter | Articles Risks to the UK Economy from Globalisation – the IMF Mission By ILS’s economics expert Peter Beighton Last year saw a high level of agreement between the International Monetary Fund (IMF) and various authorities on projections for the economy and related demands on macroeconomic policies. Given the agreements, good structural policies and the IMF's efforts to better focus surveillance, the IMF has outlined the risks - upside and downside – to the UK economy from globalization. Macroeconomic Performance in the UK Remains Impressive The growth of investment, productivity and output has rebounded from a quieter 2005 Although inflation has risen and the current account deficit has widened slightly, net immigration has spurred capacity growth Macroeconomic policy frameworks are supportive and are guiding policies to be responsive for strong growth with low inflation Financial markets have performed well as London continues to grow as a global financial centre Shock Absorbers Openness, flexibility and the wide-ranging structural reforms have paved the way for enormous benefits from globalization, which has played to the strengths of the UK economy. However, economies need to be prepared for any downsides. In the UK flexibility and sound macro frameworks are key shock absorbers. It is also important that fiscal and monetary policies are positioned to respond effectively. This means: Public debt must be kept at moderate levels and in line with the fiscal framework Monetary policy must disentangle and respond to factors driving inflation Thorough and effective supervision of the financial system must be maintained A Strong and Robust Growth Environment IMF estimate GDP growth at 2¾ per cent in each of the next two years Business investment is being boosted by healthy corporate balance sheets and the low cost of capital The growth of private consumption is based on rapid employment growth and strong household balance sheets The external current account deficit should be stable, as the deficit on trade in goods and services continues to be partly offset by strong net investment income Although the unemployment rate has risen, the IMF expects this to be temporary as the dampening effect on labour demand from higher energy costs dissipates and the recent surge in new entrants to the labour force is absorbed. Immigration is expected to boost growth, through both the direct effect on labour supply and the need to equip new workers with capital. The UK’s openness and flexibility allows it to benefit from the opportunities of globalisation and absorb shocks This is due to: The rapid growth of the world’s economy boosting the demand for exports, especially financial services, and allowing the UK to source goods from the lowest cost global producers The combination of global financial conditions and openness to capital flows, which has contributed to record levels of foreign direct investment inflows and allowed the UK to earn substantial net investment income The decision to admit workers from the new EU member states has boosted the flow of immigrants and helped to fill skills gaps While openness may increase exposure to downside global risks, it also contributes to the flexibility that allows the economy to respond to adverse developments quickly. However, this flexibility alone would not be sufficient to smooth developments in the face of some major international shocks. For more information contact Peter Beighton.