The International Monetary Fund has radically cut its economic growth forecast for the UK for the current year.
The fund expects the British economy to shrink by 0.6 per cent in 2023, compared with the growth forecast of 0.3 per cent it made in October.
High interest rates and soaring inflation will weigh on the UK this year and make it the worst-performing economy among the advanced nations, the fund said.
The growth downgrade comes against a backdrop of public sector strikes over pay and predictions that the UK is heading for a recession, with inflation still at more than 10 per cent.
Even sanctions-hit Russia is expected to perform better than Britain in 2023, despite the costs of its war in Ukraine. The IMF is predicting a 0.3 per cent expansion for the Russian economy, following a 2.2 per cent contraction in 2022.
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 Britain's predicted fall in gross domestic product reflects “tighter fiscal and monetary policies and financial conditions, and still-high energy retail prices weighing on household budgets”.
However, the IMF nudged up its outlook for UK growth in 2024 to 0.9 per cent, up from the 0.6 per cent expansion previously forecast.
But even that would still make Britain the joint-slowest growing economy in the G7 group of industrialised nations, along with Japan and Italy.
The IMF offered a chink of light in the otherwise gloomy economic update, predicting that the global slowdown will be shallower than first feared.
It upgraded its global growth forecast to 2.9 per cent in 2023, from the 2.7 per cent predicted in October, as it said the reopening of China after strict Covid-19 restrictions had “paved the way for a faster-than-expected recovery”.
Three factors
IMF chief economist Pierre-Olivier Gourinchas explained there were three primary factors motivating the UK's economic outlook.
“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 reabsorbed 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.”
In response to the IMF report, UK Chancellor Jeremy Hunt said: “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.”
Last week, Mr Hunt tried 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”.
Meanwhile, UK minister Richard Holden said the economy could “outperform” the IMF prediction that Britain will have the worst-performing economy of all advanced nations.
“What we've seen actually over the last couple of years — this isn't a forecast, this is what actually happened — both the IMF and the OECD said the UK would grow more slowly than other countries; well let's look at what actually happened,” he said.
“Actually we've grown faster than those countries, we've grown faster than Germany since 2016, we've grown faster than France, Italy and Japan since 2010. We're actually outperforming these predictions.”
Loss of labour
Paul Johnson, the director of the Institute of Fiscal Studies, told the BBC that there were a couple of issues uniquely affecting the UK economy:
“One, in particular, actually, is the loss of people from our labour force. We have heard quite a lot about how we have lost half a million plus from work, people retiring early. Immigrants not coming in from the European Union and so on. That’s not affecting any other country in Europe,” he said.
“Higher interest rates are feeding very quickly through to mortgages in the UK. And we have got, of course, the continuing challenges from Brexit.”
“It's worth saying two other things first, though. First, across the world, the IMF is actually being more optimistic than it was a few months ago.
“And secondly, later this week, we are going to get forecasts from the Bank of England, which I think will be more positive than they were two or three months ago. So, you can compare this and you can compare that. But the IMF is saying we are looking worse than other countries.”
Meanwhile, the UK research group Centre for Cities claimed on Tuesday that the unemployment rate in Britain should be much higher than the official 3.7 per cent because the calculations “do not include a hidden army of more than three million working-aged people that are involuntarily economically inactive”.
The official rate only measures those who are actively looking for employment and does not include people who are neither in work nor looking for a job due to circumstances outside of their control.
If these people were included in the unemployment measures, the rate would be three times higher at 12.1 per cent, the Centre for Cities said.
The IMF report comes a day before the largest day of industrial action in the UK in decades.
About 475,000 workers across the country — from rail workers to teachers, civil servants, driving instructors and security guards — will strike on Wednesday.
