Britain’s economic reputation has been dealt a further blow after the International Monetary Fund (IMF) forecast that this year the UK economy will fare worse than any other country in the developed world – including Russia.
In the latest update of its economic forecasts, the IMF said that it expected the UK’s gross domestic product (GDP) to contract by 0.6% in 2023.
To add further humiliation for the chancellor and prime minister, even as Britain’s outlook was downgraded, most other countries around the world saw their forecasts upgraded.
But the Fund said that while the broader global economy was doing better than expected, with inflation having peaked and investment beginning to turn around, the UK economy would face a downgrade “reflecting tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets.”
The UK had previously been forecast to grow by 0.3% this year and 0.6% next year.
Now, said the Fund, it should expect -0.6% this year and 0.9% growth in 2024.
The comments are especially awkward for the Treasury, which has been criticised by some for its plans to raise taxes and reduce the budget deficit in coming years, resulting in an increase in costs for businesses and households, even as they continue to battle a cost of living crisis.
Up until recently, chancellor Jeremy Hunt had contextualised the UK’s relatively weak growth by pointing to the fact that the IMF’s recent forecasts projected that a third of countries were facing a recession.
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However, the Fund has now upgraded its growth projections for Italy and Germany, with the result that both will now grow more than the UK in 2023.
Indeed, Britain’s -0.6% GDP is the worst of any economy included in its latest forecast update, including Russia – which despite facing sanctions from most of the West is projected to grow by 0.3%.
The poor growth was blamed on three factors: the UK’s dependency on gas – which has rocketed since the invasion of Ukraine; the fact employment has not returned to pre-pandemic levels; and increasing interest rates which have made mortgage payments more expensive.
Pierre-Olivier Gourinchas the director of research of the IMF laid out the rationale at a press conference on Tuesday morning.
The UK has a larger share of energy that comes from natural gas, he explained, “with higher pass through to final consumers” which has resulted in a “stronger cost of living crisis in the UK”.
Chancellor says UK ‘not immune’ from pressure
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.”
The IMF said it now expected the global economy to expand by 2.9% in 2023.
Although this is down from the 3.4% in 2022, it is nonetheless 0.2 percentage points faster than the Fund previously forecast in October.
It said: “Adverse risks have moderated since the October 2022 [World Economic Outlook].
“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.”
After China’s decision to open up its economy and ditch its zero-COVID policy, the Fund upgraded its GDP projection from 4.4% to 5.2% this year.
It said the US would grow by 1.4%, rather than its previous projection of 1%.
Germany, which was previously forecast to shrink by 0.3%, is now slated to grow by 0.1%.