7:48 am, January 31, 2023
The International Monetary Fund believes Britain will be one of the hardest hit economies in the G7 this year.
In an update, the IMF predicted the UK economy will contract by 0.6 per cent this year, worsening its forecast of 0.3 per cent published in October.
The downgrade comes as the IMF believes inflation and higher interest rates will cause consumers to tighten their belts.
The IMF did upgrade its forecast for next year, though, from 0.6 per cent growth to 0.9 per cent.
The outlook for the UK puts it behind it lagging behind its G7 counterparts as the only one to suffer a decline in GDP.
The IMF’s 2023 GDP predictions show growth of 1.4 per cent in the United States, 0.1 per cent in Germany, 0.7 per cent in France, 0.6 per cent in Italy, 1.8 per cent in Japan and 1.5 per cent in Canada.
The IMF said: ‘Consumer confidence and business sentiment have worsened.
‘With inflation at about 10 per cent or above in several euro area countries and the United Kingdom, household budgets remain stretched.
‘The accelerated pace of rate increases by the Bank of England and the European Central Bank is tightening financial conditions and cooling demand in the housing sector and beyond.’
The update comes just two weeks after the governor of the Bank of England Andrew Bailey said he thought a recession in the UK would not be as bad as first feared.
He predicted that inflation will begin to fall rapidly in late spring as lower energy prices trickle through and that interest rates are likely to peak at 4.5 per cent.
The IMF said Britain’s predicted GDP fall reflects ‘tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets’.
The IMF does believe that the global slowdown will be shallower than it first predicted. It has upgraded global growth to 2.9 per cent this year (from 2.7 per cent).
It follows efforts by Chancellor Jeremy Hunt last week to talk up the UK economy and its growth prospects in his first major speech in the post, declaring that “declinism about Britain was wrong in the past and it is wrong today”.
Pierre-Olivier Gourinchas, chief economist for the IMF, said the UK’s issues were caused by high exposure to gas prices, fewer people returning to the labour market after Covid and tightening monetary policies leading to higher interest rates.
He added: ‘The UK has a fairly high share of adjustable rate mortgages. So when the Bank of England starts increasing rates, it feeds into the mortgage rates that mortgage holders are paying, and that is also weighing down economic activity.’
The chancellor, Jeremy 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.’
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