The UK economy will shrink this year and perform worse than all of the advanced nations as the cost of living crisis continues to hit households, the International Monetary Fund (IMF) has warned.
In its latest World Economic Outlook update, the IMF downgraded its UK gross domestic product (GDP) forecast once again and said the economy will contract by 0.6% in 2023, rather than grow by 0.3% as previously predicted. The outlook means Britain looks set to suffer more than most from soaring inflation and higher interest rates.
The grim outlook puts the UK far behind its counterparts in the G7 group of advanced nations and the only country – across advanced and emerging economies – expected by the IMF to suffer a year of declining GDP.
However, the IMF nudged up its outlook for UK growth in 2024 to 0.9%, up from the 0.6% expansion previously forecast, and also said that after the Autumn Statement it thinks the UK economy is now “on the right track”.
Among the other G7 nations, the IMF’s 2023 GDP predictions show growth of 1.4% in the United States, 0.1% in Germany, 0.7% in France, 0.6% in Italy, 1.8% in Japan and 1.5% in Canada.
It comes against a backdrop of public sector strikes over pay and predictions that the UK is heading for a recession, with inflation still standing at more than 10%.
The IMF said Britain’s predicted GDP fall reflects “tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets”.
It follows efforts by Chancellor Jeremy Hunt last week to talk up the UK economy and its growth prospects in his first major speech in the post, when he said that “declinism about Britain was wrong in the past and it is wrong today”.
Global economy to expand and inflation to fall in 2023
The IMF offered a positive outlook in the otherwise gloomy economic update and said it expects the global economy to expand by 2.9% in 2023, up from the 2.7% predicted in October. It said the reopening of China after strict Covid restrictions has “paved the way for a faster-than-expected recovery”.
The IMF also said it believes global inflation has passed its peak and will fall from 8.8% last year to 6.6% in 2023, and 4.3% in 2024, as interest rate hikes by central banks begin to cool demand and slow price rises. But it warned that, in the UK and Europe, surging prices and the impact of action taken to rein in inflation, will continue to weigh on the economy.
Chief economist for the IMF, Pierre-Olivier Gourinchas, explained there were three primary factors motivating the UK’s economic outlook. He said: “First, there is exposure to natural gas… we’ve had a very sharp increase in energy prices in the UK. There is a larger share of energy that is coming from natural gas, with a higher pass-through to final consumers.
“The UK’s employment levels have also not recovered to pre-pandemic levels. This is a situation where you have a very, very tight labour market but you have an economy that has not re-absorbed into employment as many people as it had before. That means there is less output, less production.
“The third is that there is a very sharp monetary tightening because inflation has been very elevated, that’s a side effect of this high pass-through of energy prices. Inflation was 9.1% last year, and it’s expected to actually remain quite high in this coming year at 8.2% (so) the Bank of England has started tightening.
“The UK has a fairly high share of adjustable rate mortgages. So when the Bank of England starts increasing rates, it feeds into the mortgage rates that mortgage holders are paying, and that is also weighing down economic activity.”
Mr Hunt said of the forecast: “The Governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted, however these figures confirm we are not immune to the pressures hitting nearly all advanced economies.
“Short-term challenges should not obscure our long-term prospects – the UK outperformed many forecasts last year, and if we stick to our plan to halve inflation, the UK is still predicted to grow faster than Germany and Japan over the coming years.”