The UK is set to be the world’s worst-performing big economy this year, according to the International Monetary Fund (IMF).
In its latest World Economic Outlook update, the IMF downgraded its UK GDP forecast, predicting a contraction of 0.6 per cent. The new outlook for the year puts the UK behind its counterparts in the G7 group of nations and the only country, across advanced and emerging economies, expected by the IMF to suffer a year of declining GDP.
Among the other G7 nations, the IMF’s 2023 GDP predictions show growth of 1.4 per cent in the US, 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 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”.
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The IMF’s prediction of a contraction of 0.6 per cent this year is a reassessment from October, when it was said that the UK could face 0.3 per cent of growth.
“Adverse risks have moderated since the October [forecast]”, the IMF said. “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.”
Asked on Sky News this morning whether the government recognised the new IMF prediction, road and local transport minister Richard Holden suggested that the forecast is probably “wrong”.
He said: “If you look into the IMF report they also praised what the government has done over the past few months with Jeremy and Rishi coming in, helping stabilise the situation. What we also have seen in the last few months is that actually the UK’s outperformed the IMF’s predictions for last year and the OECD’s predictions and the year before. Since 2016, we’ve performed better than Germany, for example.
“I’m interested in outcomes”, Mr Holden added.
When it was put to the minister that the IMF had concluded that the UK’s economy is worse than Russia, Mr Holden said: “the proof will be in the pudding”.
Asked again whether the IMF had “got it wrong”, he continued: “I think so. The IMF has also changed its mind on some of these aspects before. And the figures have shown that the IMF were wrong”.
Mr Holden also said the UK has outperformed German and Japan over the past few years.
Responding to the IMF figures, Labour’s shadow chancellor Rachel Reeves MP, said there were too many signs that Britain was “lagging behind our peers”.
Ms Reeves said: “The government should be doing all it can to make our economy stronger and to get it growing. It is the only way that we can move beyond lurching from crisis to crisis as we have been for far too long”.
Chief economist for the IMF, Pierre-Olivier Gourinchas, explained there were three primary factors motivating the UK’s economic outlook.
He said: “First, there is exposure to natural gas… we’ve had a very sharp increase in energy prices in the UK. There is a larger share of energy that is coming from natural gas, with a higher pass-through to final consumers.
“The UK’s employment levels have also not recovered to pre-pandemic levels. This is a situation where you have a very, very tight labour market but you have an economy that has not re-absorbed into employment as many people as it had before. That means there is less output, less production.
“The third is that there is a very sharp monetary tightening because inflation has been very elevated, that’s a side effect of this high pass-through of energy prices.
“Inflation was 9.1 per cent last year, and it’s expected to actually remain quite high in this coming year at 8.2 per cent (so) the Bank of England has started tightening.
“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”.
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