The faster world trade recovers, the better for Britain

According to the IMF’s latest forecasts, Britain will endure the worst economic performance of any large economy in 2023, including Russia, and will stage only a relatively modest comeback in 2024.

Over the two-year horizon, it is easily the worst outlook among the advanced economies – and some further distance behind fast-growing emerging economies in Asia and America. A few more years of this and the UK will no longer be the sixth biggest economy in the world, and could be overtaken decisively by poorer but more populous nations such as Brazil and Turkey. In terms of income per head, the likes of Poland and Slovenia may outstrip the UK by the end of the decade.

Even making the most generous allowances for the effects of Covid, the war in Ukraine, and Britain’s long-term relative weakness in productivity and investment inside and outside the EU, it would seem that the Brexit “dividend” is meagre at best.

If the kind of growth rates the UK was accustomed to are ever going to return, then some sort of closer relationship with the EU is essential. It seems clear now that the UK could quite painlessly agree informally or formally to dynamic alignment with some EU rules that would hardly infringe on the practical exercise of sovereignty. Politically, reversing Brexit seems unrealistic, however. The public – only about a half of whom were ever actually in favour of leaving the EU – are certainly not pleased by how Brexit has gone. Yet a re-run of the trauma and divisions of recent years (with or without another referendum) is even less appealing. For now, sleeping dogs will have to be allowed to doze on.

One other precondition of growth is within the control of the UK authorities, though, and that is the defeat of inflation. As the IMF rightly observes, the trend to higher interest rates, and taxes and lower public spending, will hit living standards, but there seems little alternative to that road strategy if job- and growth-destroying inflation is to be avoided.

As ever, the government can, and should, find fairer ways to spread the burden of adjustment, such as paying nurses and teachers a competitive salary; but the macro-economic thrust of policy is correct, given where the UK is now. To some degree, Rishi Sunak and Jeremy Hunt are repairing the damage caused by the varied misjudgements made by the administrations of Liz Truss, Boris Johnson, Theresa May, David Cameron and even, to a much lesser degree, their Labour predecessors.

For an open economy such as the UK that relies on global trade and investment flows for its livelihood, the IMF report makes for some sobering reading. On the bright side, large dynamic emerging economies such as China and India will keep the world economy as a whole growing, just as they have ever since the Global Financial Crisis derailed the long benign period of noninflationary growth that preceded it.

More speculatively, if the war in Ukraine ends satisfactorily, and Russia abandons territorial expansionism and turns outwards to the world, a major driver of inflation and instability would be eliminated – though it’s also possible that the war would spread or turn into a quagmire. The IMF is also right to fret about how the world will cope with its post-pandemic debt overhangs, how deglobalisation can be managed, and how sustainable green growth can be protected at a time when the easy option for governments is to simply burn more fossil fuels.

Overall, given the last decade and a half, the world economy is probably in a better place than it has any right to be. The kind of protectionist-driven slump that engulfed the world in the Thirties has been avoided, thus far at least. The determined, unified front presented to Vladimir Putin by the West and Nato ought to have at least deterred him from any dreams of trying to recreate the Soviet empire in Eastern Europe, and may yet drive him out of Ukraine.

It’s also fair to say that while progress on the climate crisis has been disappointing, and has fallen back during the energy crisis, there is still some momentum towards sustainable growth. The scientific arguments have been won.

The 2020s for the world economy look to be a decade of recovery, rebuilding and modest growth, albeit uncertainly and haltingly delivered. It will be the case for Britain too, (and outside the EU) that the faster world trade recovers, the better. As the decade goes on, frustrations in the UK about sluggish growth in living standards at home – contrasting with continuing evidence of the value and benefits of being a leading member of the EU – will hopefully draw the UK back towards the prosperous heart of Europe.