The UK is on course to be the world’s worst-performing big economy this year, according to the International Monetary Fund.
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In an update to its growth outlook, the IMF delivered a hefty blow to Britain’s prospects despite brightening global conditions, with a 0.9 percentage point downgrade to the UK’s annual growth projection year.
It expects the economy to contract by 0.6 per cent in 2023, which would make Britain the slowest-growing big economy in the world. The Russian economy is expected to grow by 0.3 per cent this year after a 2.2 per cent contraction in 2022.
The IMF has upgraded its global growth forecasts in response to plummeting global energy prices and hopes that inflation will fall faster than expected. Britain is notable for being the only big economy expected to contract, according to the forecasts, while next year’s growth is expected to rise to 0.9 per cent, 0.3 percentage points up on the IMF’s last forecast in October.
Britain’s underperformance relative to its peers is the result of “tighter fiscal and monetary policies and financial conditions, and still-high energy retail prices weighing on household budgets”, the IMF said.
The outlook is a blow to the government before the spring statement in March, with Jeremy Hunt, the chancellor, under pressure to provide relief to households as market energy costs reduce government borrowing needs.
Hunt pointed to comments by the governor of the Bank of England that any recession this year was likely to be “shallower than previously predicted”. But he added: “These figures confirm we are not immune to the pressures hitting nearly all advanced economies. 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 UK is the only economy in the G7 not to have reached its pre-pandemic size and has suffered the worst inflation rate of its peers in the past year. The economy is forecast to enter recession within months, with the downturn expected to last until the end of the year. The IMF said UK households were suffering from “stretched budgets” while high interest rates were raising borrowing costs and slowing down the housing market. The Bank of England is expected to raise rates again on Thursday to get a handle on high inflation.
Overall, the IMF raised its global growth forecast by 0.2 percentage points to 2.9 per cent this year after an expansion of 3.4 per cent last year. The upgrade is largely the result of China’s emergence from its Covid-19 lockdown and a fall in the record energy costs that plagued the world economy last year.
“Adverse risks have moderated since the October [forecast]”, the IMF said. “On the upside, a stronger boost from pent-up demand in numerous economies or a faster fall in inflation are plausible. On the downside severe health outcomes in China could hold back the recovery, Russia’s war in Ukraine could escalate and tighter global financing conditions could worsen debt distress.”
Europe and the US have recorded better than expected falls in inflation and signs of robust economic output at the end of last year. Global growth is expected to accelerate to 3.1 per cent next year, a slight downgrade from the IMF’s autumn projections.