UK economy to contract by 0.3% – IMF

The International Monetary Fund (IMF) has warned that the UK economy will be at the back of the G7 countries this year, with the economy expected to contract by 0.3%, and will continue to be affected by the rising cost of energy and inflation. The IMF pointed out the UK and the euro area as being particularly affected by these issues, as they both struggle with higher inflation and energy costs. The IMF said that if the recent problems at banks in the US and Switzerland were an early warning of a severe financial crisis, global growth could slow to just 1%.

The IMF revised up slightly its estimate of UK growth this year, but still expected the economy to contract by 0.3%, based on its central assumption that a financial meltdown would be avoided. Chancellor Jeremy Hunt claimed that the IMF had upgraded the UK by more than any other G7 country, and the country was on the right track for economic growth. On the other hand, Labour’s Rachel Reeves argued that the IMF forecasts showed how far Britain continued to lag behind on the global stage. The UK is one of only two G7 countries predicted to contract in 2023.

The IMF’s economic counsellor, Pierre-Olivier Gourinchas, warned that the UK would have no early respite from its cost of living crisis, which has taken the annual inflation rate to 10.4%, and only a modest bounceback to 1% growth next year, when the general election is expected to be held. Gourinchas added that the IMF predicted a recession in 2023 due to the sharp impact of rising energy prices, monetary policy tightening and some tightening of financial conditions. The fund expected global growth to slow from 3.4% in 2022 to 2.8% this year, with the risks of an even sharper easing if last month’s problems affecting regional US banks prove to be symptomatic of a more widespread malaise.

The WEO noted that the leading forces that affected the global economy in 2022 had been overlaid and were interacting with financial stability concerns. “A hard landing – particularly for advanced economies – has become a much larger risk,” the report said. “Policymakers may face difficult trade-offs to bring sticky inflation down and maintain growth while also preserving financial stability.” The IMF backed central banks in their determination to bring inflation back down from the highest level in four decades, but admitted that higher interest rates could expose underlying problems in the financial system.