IMF backtracks on UK recession prediction

International Monetary Fund now believes Britain will avoid recession this year but growth will remain sluggish

A shopper pays for groceries at an indoor market in Sheffield. Bloomberg
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The International Monetary Fund has made a U-turn on its prediction that the UK economy will fall into a recession this year.

A month ago, the IMF was forecasting a 0.3 per cent contraction for the UK economy this year, which itself was a revision of a prediction of a 0.6 per cent contraction from a few months earlier.

“Buoyed by resilient demand in the context of declining energy prices, the UK economy is expected to avoid a recession and maintain positive growth in 2023,” the IMF said.

Chancellor Jeremy Hunt said: “Today’s IMF report shows a big upgrade to the UK’s growth forecast and credits our action to restore stability and tame inflation.

“It praises our childcare reforms, the Windsor Framework and business investment incentives. If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy – but the job is not done yet.”

The less gloomy outlook comes after an IMF team held meetings last week with officials from the Treasury, the Bank of England and City regulator the Financial Conduct Authority, as well as with independent watchdogs at the Office for Budget Responsibility.

Economic growth in the UK will slow to 0.4 per cent in 2023, “held back by tighter monetary and fiscal policies needed to curb inflation, and lingering impacts of the terms-of-trade shock”, the IMF said.

“This latest forecast represents a 0.7 percentage point upgrade to the IMF’s April World Economic Outlook forecast of -0.3 per cent."

The IMF now predicts the UK economy will grow by 1 per cent next year and by 2 per cent in 2025 and 2026.

Speaking in London on Tuesday, Kristalina Georgieva, IMF managing director, said the UK could outperform Germany economically. Bloomberg

The IMF's upgraded growth forecast puts the UK ahead of Germany's economy, which is predicted to shrink by 0.1 per cent this year, meaning that Britain can shed the title of “worst-performer” in the G7 group of advanced economies.

"We are likely to see the UK performing better than Germany, for example," IMF managing director Kristalina Georgieva said in answer to a question from The National.

"One mistake that we often make is that we focus on one year and one year is not the very best way to judge performance of the country.

"If you look at the last three years, then actually the UK's performance is quite good vis-a-vis the rest of the G7.

"So, I think we have to recognise that there has been a very significant turnaround in policy and that is building benefits for the UK, and for the people of the UK."

The IMF forecast inflation would near the Bank of England's 2 per cent target. Bloomberg

Inflation still a worry

However, the IMF highlighted the continuing problem of inflation and while figures due out on Wednesday are expected to show inflation fell into single digits in April, the IMF warned against “premature celebrations” that price rises were being tamed.

The IMF forecast inflation would near the Bank of England's 2 per cent target by the middle of 2025, six months later than it had previously predicted. It also stressed the need for the Bank of England to keep monetary policy tight.

“Some further monetary tightening will likely be needed, and rates may have to remain high for longer to bring down inflation more assuredly,” the IMF said.

Ms Georgieva predicted that UK interest rates were unlikely to fall significantly any time soon and said the narrative around them had "somewhat shifted from 'how high?' to 'for how long?'"

Meanwhile, the IMF said UK authorities had dealt well with recent concerns regarding the banking industry, sparked by the collapse of Silicon Valley Bank in the US and the hurried sale of troubled Credit Suisse to Swiss rival UBS.

“The UK financial system has weathered the recent global banking stress well,” the IMF said.

“Continued strong oversight, including of smaller banks and the diverse non-bank financial sector, will be critical to preserve UK financial stability, which the IMF sees as a global public good.”

Overall, the IMF said while the UK was doing markedly better and was likely to avoid a recession this year, a degree of vigilance was required in fiscal and monetary policy to ensure inflation and other factors do not hamper future growth.

“Monetary policy will need to remain tight in order to keep inflation expectations well-anchored and bring inflation to target,” the IMF said.

“Fiscal policy should continue to be aligned with monetary policy in the fight against inflation, while protecting key public services and the vulnerable.”

Updated: May 23, 2023, 1:32 PM