The UK will retain its position as the worst-performing major economy in the world this year, according to forecasts from the International Monetary Fund, which has warned that global inflation will stay higher for longer.
Despite a brightening outlook this year, the UK will record a 0.3 per cent growth contraction in 2023, the fund said. That is a 0.3 percentage point upgrade to its projections made at the start of the year but means Britain is only the second economy to contract along with Germany this year.
The fund’s forecasts are in line with projections from the Bank of England and Office for Budget Responsibility, the official forecaster, which have revised up their outlook for the year, but expect growth to remain weak by historical standards as inflation and the cost of living bite.
UK growth is expected to accelerate 1 per cent next year, a 0.1 percentage point upgrade from January, and similar to rates in Japan and the United States, the fund said. Growth accelerated 4 per cent in 2022, the second highest among rich-world economies after Spain, but the UK is one of the few major economies to remain below its pre-pandemic size.
The IMF downgraded its outlook for global growth by 0.1 percentage point to 2.8 per cent this year and 3 per cent next year, as it expected inflation to remain persistently high in major economies. It has said growth over the next five years will be the weakest since the early 1990s.
Pierre-Olivier Gourinchas, IMF chief economist, said “the fog around the world economic outlook has thickened”. He added: “Inflation is much stickier than anticipated even a few months ago. While global inflation has declined, that reflects mostly the sharp reversal in energy and food prices. But core inflation, which excludes energy and food, has not yet peaked in many countries.”
Germany will record the second-lowest growth rate among major economies this year, declining 0.1 per cent, while the 20-country eurozone will grow 0.8 per cent on average. The US is expected to expand 1.6 per cent and Japan 1.3 per cent.
Core inflation has risen to an all-time high in the eurozone and is 5.5 per cent in the US, more than twice the Federal Reserve’s target rate. It suggests that underlying inflationary pressures in rich economies remain strong despite falling headline inflation rates.
The IMF thinks global core inflation will fall to 5.1 per cent by the end of the year, 0.6 percentage points higher than its January projection.
Gourinchas said the strength of inflationary pressures, caused partly by rising wages and still-low unemployment rates, could force central banks to extend their aggressive monetary tightening in the coming months. “This may call for monetary policy to tighten further or to stay tighter for longer than currently anticipated,” he said.
The IMF highlighted the UK’s double-digit inflation as piling pressure on household budgets. It also pointed to September’s panicked selling of UK bonds after the mini-budget as a warning about the fragility of financial stability after three US banks collapsed last month.
Gourinchas said investors and financial markets had become “complacent” about the risks posed by rapidly rising interest rates which makes money more expensive and hits the value of assets such as government debt held by investors. Further banking turmoil is one of the “significant risks” stalking the global economy and it could reduce the supply of credit to households and businesses, the IMF said.
“The side-effects that the sharp monetary policy tightening of the last year is starting to have on the financial sector, as we have repeatedly warned, might happen. Perhaps the surprise is that it took so long,” Gourinchas said.