The International Monetary Fund (IMF) has warned the UK economy is on course for the worst performance of any of the G7 group of the world’s largest democratic economies.
The organisation has forecasted a sharp contraction in growth, with it now predicting the UK will fall into a recession over the course of 2023. There have been doubts about whether UK economic growth will reverse as expected, after recent official GDP figures recorded unexpected growth in November 2022.
Its latest assessment of the UK’s situation comes four months after the IMF laid into the fiscal plans announced by Liz Truss and her Chancellor of the Exchequer Kwasi Kwarteng in the mini budget. At the time, it urged the then-Chancellor to “reevaluate” his tax plans as they risked increasing inequality - a statement that coincided with a record fall in the value of the pound against the US dollar.
While the Truss government was soon deposed, we are still living with the consequences of the mini budget. Mortgage rates are significantly higher than they were at this time last year, and the Rishi Sunak administration has opted to try to recover the UK economy with a light version of austerity.
But what exactly has the IMF said about the UK economy - and what does the organisation do? Here’s everything you need to know.
What is the IMF?
The IMF is an international organisation that is governed and made accountable to 190 member countries. It is led by Kristalina Georgieva, an economist who previously led the World Bank.
Member countries pay a fee to be a part of the IMF, with richer countries paying in more. States must also abide by rules governing how transparent they are about their economies.
The IMF’s main goal is to ensure “sustainable growth and prosperity” in these nations. Part of what it does is to discourage states from pursuing policies that would be harmful to prosperity.
The IMF monitors all of the world’s economies, providing advice for how they can perform to the best of their abilities, and also tracks potential global economic issues, like trade disputes.
Another role it plays is as a lender of last resort for countries whose economies get into a nosedive they cannot pull out of. When this scenario happens, the IMF can loan up to $1 trillion to allow these countries to restructure their economies and their sovereign debt.
Low-income countries pay no interest on these loans. The largest amount the IMF has paid out to a member has been the $57 billion (£53.4 billion) it lent to Argentina in 2018.
While the organisation has had success in the past by getting Mexico and Brazil through their respective economic crises, it has been criticised for being too heavy-handed in other situations. For example, when Greece’s economy collapsed in 2009, the austerity measures it demanded the country introduce were deemed to have damaged the Greek economy and its society.
Usually, most of the organisation’s work focuses on developing countries. It means the intervention it made on the UK economy in September 2022 - one of the G7 group of the world’s richest nations - is unprecedented.
What did IMF say about Liz Truss economic plans?
In an intervention on 27 September 2022, the IMF called on the UK government to change course away from its tax cutting agenda, particularly its removal of the top rate of income tax. The organisation urged then-Chancellor Kwasi Kwarteng to “reevaluate the tax measures”.
“We understand that the sizeable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures,” the IMF statement said. “However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy. Furthermore, the nature of the UK measures will likely increase inequality.
“The November budget [which eventually took place on 31 October and was delivered by Kwarteng’s successor Jeremy Hunt] will present an early opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners.”
While the Truss’s allies hit back at the IMF - former Brexit Secretary Lord Frost was especially critical of the organisation - the government eventually heeded its warning. After Truss unceremoniously sacked Kwarteng and replaced him with Jeremy Hunt, the new Chancellor scrapped many of the most controversial measures in the mini budget. Under Rishi Sunak’s premiership, he then announced a series of major tax increases in a bid to restore the UK’s economic credibility in the Autumn Statement 2022.
What are the latest IMF concerns about the UK?
The IMF announced its latest World Economic Outlook update on Tuesday 31 January.
It included another downgrading of the UK’s gross domestic product (GDP) and said the country’s economy will contract by 0.6% in 2023, rather than grow by 0.3% as previously predicted. It means the UK is well behind the world’s other major democratic economies - all of which are predicted to maintain growth this year.
But the IMF also improved its outlook for UK GDP in 2024, nudging it up to 0.9%, up from the 0.6% expansion previously forecast. It said it believes the UK is “on the right track” after the Autumn Statement.
The organisation said the UK’s initial GDP fall came as a result of “tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets”. So basically, high interest rates and high inflation - in other words, the cost of living crisis - are going to slam the economy into reverse over the next 12 months. The IMF also cited the energy crisis and “tight” labour market as key factors.
It comes after Jeremy Hunt delivered a major economic speech last week in an apparent response to several gloomy outlooks from different business sectors. He said: “declinism about Britain was wrong in the past and it is wrong today”.
Responding to the latest IMF forecast, Hunt said: “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.”
The plan referenced by Hunt to halve UK inflation is widely predicted to happen anyway, largely thanks to the Bank of England’s base rate rises - another of which is expected on Thursday (2 February). While lower inflation is viewed by economists as a good thing, it still means prices are getting more expensive - especially given wages are failing to keep up with inflation.
While Hunt appeared to be accepting of what the IMF said, government minister Richard Holden took a more critical line on its findings. He insisted the UK can “outperform” its predictions and claimed the organisation had been “wrong in the last two years”.
Shadow Chancellor Rachel Reeves said criticism that some of the IMF’s previous forecasts had proved to be incorrect did not take away from the “facts” about the UK economy’s “failing” state under successive Conservative administrations.