IMF downgrades UK growth forecast, only G7 expected to decline

A man works out in a park overlooking the city center of Birmingham, England, on Thursday, January 28, 2021.

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The London International Monetary Fund (IMF) has downgraded its outlook for the UK economy, despite taking a more optimistic stance on global growth.

The new 2023 forecast, released on Monday evening, also sees the UK as the only “advanced economy”, down 0.6%. This is 0.9 percentage point lower than the previous estimate.

It’s also worse than the forecast for Russia, which was expecting a 0.3% decline.

IMF Research Director Pierre-Olivier Gourinchas said there were three main reasons. Despite a very tight labor market, employment remains below pre-pandemic levels, reducing output. sharp monetary tightening.

However, the group raised its 2024 forecast for the UK to 0.9% from 0.6%.

In 2023, the IMF predicted growth of 1.4% in the United States, 0.7% in the Eurozone, 1.8% in Japan, and 1.5% in Canada.

Meanwhile, the global economic forecast was raised by 0.2 percentage point from the 2.9% announced in October.

“Although still weak by historical standards, factors such as China’s resumption of COVID-19, robust labor markets and household consumption in the US and better-than-expected adaptation to Europe’s energy crisis have brightened the picture,” the IMF said.

But he said persistently high inflation and tight fiscal and monetary policies in the UK and other European countries would strain household budgets.

Preliminary figures on Tuesday showed that the eurozone avoided contraction in the fourth quarter of 2022, growing 0.1% compared to 0.3% in the third quarter, although some still believe the block will enter a recession.

UK GDP is estimated to have fallen 0.3% in the third quarter and fourth quarter results, due on 10 February, are widely expected to show another decline.

Goldman Sachs and the KPMG team’s pessimistic forecasts for the UK have marked a potential deterioration in the labor market this year as well as strained disposable income as a major concern.

The UK faces challenges such as high long-term morbidity and reduced trade due to Brexit.

Since the IMF last prepared forecasts, the UK has also suffered the chaos of former Prime Minister Liz Truss’s budget bill, which was put forward as a radical plan to spur growth but was radically withdrawn after sparking chaos in financial markets.

Last November, the Bank of England expected UK GDP to contract by 1.5 per cent in 2023, but has since said slightly improved inflation projections and a short-term fiscal support package would improve the situation. Thursday’s monetary policy announcement is likely to provide an update.

Is it too harsh?

Paul Johnson, director of the Research Group at the Institute for Fiscal Studies, said the IMF’s forecast for the UK was “difficult to determine what is driving it” and “why it has deteriorated since the fall”.

He added that the year would be “tough” with falling living standards and a sluggish economy, but there was little new in the IMF update.

Sophie Lund-Yates, senior analyst at Hargreaves Lansdown, said UK’s unique challenges include exorbitantly high mortgage rates, along with labor shortages and overexposure to energy retail prices.

“Given the upgrades to expectations from other institutions in recent months, it is possible that the UK will perform better than the IMF predicts,” she said.

“Until we find a clear path out of the recession, markets will be very sensitive to interest rates and inflation.”

UK Chancellor Jeremy Hunt responded to the IMF forecast by saying: It will grow faster than Germany and Japan in the next few years.”

Last week he gave a speech to his tech bosses calling for optimism about the UK economy.

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