The International Monetary Fund (IMF) has warned that the UK economy will collapse in reverse this year as the cost-of-living crisis hits households hard and sees the worst performance of any developed country.
In its latest World Economic Outlook update, the IMF again downgraded its UK Gross Domestic Product (GDP) forecast to contract by 0.6% from a 0.3% rise recorded in October last year as the UK appears to be bigger than the rest of the world. affected by the rapid rise in inflation. and higher interest rates.
But he raised his forecast for UK growth in 2024 to 0.9% from a previously forecast growth of 0.6%.
The gloomy outlook for the year ahead puts the UK far behind its G7 peers and the only advanced and emerging economy that the IMF predicts will suffer a decline in GDP during the year.
Among other G7 countries, IMF GDP projections for 2023 show growth of 1.4% in the US, 0.1% in Germany, 0.7% in France, 0.6% in Italy, 1.8% in Japan, and 1. 5% in Canada.
This comes amid public sector wage strikes and forecasts that the UK is heading into recession with inflation still above 10%.
The IMF said the projected fall in UK GDP reflects “tighter fiscal and monetary policies and financial conditions, as well as still high retail energy prices, which are weighing on household budgets.”
This followed attempts by Chancellor Jeremy Hunt last week to speak about the UK economy and its growth prospects in his first major postal address, saying that “British decline was wrong in the past and wrong today.”
The IMF shed light on the gloomy economic report by predicting that the global slowdown will be less severe than initially thought.
He raised his forecast for global growth to 2.9% in 2023 from 2.7% forecast in October as he said China’s reopening after strict Covid restrictions “paved the way for a faster-than-expected recovery.”
The IMF also said it believes global inflation has peaked and will fall from 8.8% last year to 6.6% in 2023 and 4.3% in 2024 as central bank interest rate hikes begin to cool demand and slow down price increases.
But he warned that in the UK and Europe, rising prices and the impact of measures taken to curb inflation would continue to put pressure on the economy.
It says: “Consumer confidence and business sentiment have deteriorated.
“With inflation around 10% or higher in several eurozone countries and the United Kingdom, household budgets remain tight.
“The accelerated pace of rate hikes by the Bank of England and the European Central Bank is tightening financial conditions and cooling demand in the housing sector and beyond.”
IMF Chief Economist Pierre-Olivier Gurinsha explained that the UK’s economic outlook is determined by three main factors.
He said: “First is the impact of natural gas… we have had a very sharp increase in energy prices in the UK. A larger share of energy comes from natural gas with higher transfer to end consumers.
“Employment rates in the UK have also not recovered to pre-pandemic levels. It’s a situation where you have a very, very tight job market, but you have an economy that hasn’t hired as many people as it used to. This means less production, less production.
“Third, there is a very sharp tightening of monetary policy as inflation has been very high, which is a side effect of this high pass-through in energy prices.
“Inflation last year was 9.1% and it is expected to remain quite high next year at 8.2% (so) the Bank of England has started to tighten policy.
“The UK has a fairly high proportion of adjustable rate mortgages. So when the Bank of England starts raising rates, it affects the mortgage rates that mortgage holders pay, and that also dampens economic activity.”
Mr Hunt said: “The Governor of the Bank of England recently said that any recession in the UK this year is likely to be shallower than previously predicted, but these figures confirm that we are not immune to the pressure that affects almost all countries with developed economy.
“Short-term concerns should not overshadow our long-term outlook – the UK beat many forecasts last year and if we stick to our plan to halve inflation, the UK is projected to grow faster than Germany and Japan in the coming years. ”
