UK financial system solely G7 nation to shrink in 2023 – IMF

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The UK financial system will shrink and carry out worse than different superior economies as the price of living continues to hit households, the International Monetary Fund (IMF) has mentioned.

The IMF mentioned the financial system will contract by 0.6% in 2023, somewhat than develop barely as beforehand predicted.

However, the IMF additionally mentioned that after the Autumn Statement it thinks the UK financial system is now “on the right track”.

Chancellor Jeremy Hunt mentioned the UK outperformed many forecasts final yr.

In its World Economic Outlook replace, the IMF, which works to stabilise financial progress, mentioned the UK’s Gross Domestic Product (GDP) would shrink somewhat than develop by 0.3% this yr.

It predicted the UK can be the one nation – internationally’s superior and rising economies – to endure a yr of declining GDP.

The IMF mentioned its new forecast mirrored the UK’s excessive vitality costs and monetary situations, reminiscent of excessive inflation.

IMF Chief Economist Pierre-Olivier Gourinchas informed the BBC that for 2022, the UK had had “fairly robust” progress at 4.1%, which he mentioned was “one of the strongest growth numbers in Europe”.

“But it is true that we are forecasting a sharp slowdown in 2023, with growth that would turn even negative for the year.”

He mentioned the revision mirrored the “fact that we have a very challenging environment in the United Kingdom”, which he mentioned was attributable to excessive vitality costs in addition to “high dependence on liquid natural gas”.

“As a response to this high inflation there is a tightening of monetary policy by the Bank of England and in the UK this feeds quickly into mortgages, because a lot of mortgages are adjustable rates,” he mentioned.

“So a lot of homeowners with mortgages are seeing an increase in their mortgage payments.”

Mr Gourinchas additionally mentioned an element within the UK’s forecast was that employment was nonetheless beneath pre-pandemic ranges.

He mentioned the plans outlined by the Treasury within the months because the Autumn Statement confirmed the UK was “certainly trying to carefully navigate these different challenges and we think that they are on the right track”.

However, the IMF mentioned in 2024 it anticipated UK progress to be 0.9%, up from 0.6% beforehand.

GDP is a measure for how effectively, or badly, an financial system is doing and in a rising financial system, every quarterly GDP might be barely greater than the quarter earlier than.

If a rustic’s GDP falls for 2 quarters in a row, it means it’s in recession and it’s a signal that its financial system is doing badly. Typically when a rustic is in recession, firms make much less cash and the variety of folks unemployed rises.

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Analysis Box By Faisal Islam, Economics Editor

Against the backdrop of rising expectations of a milder recession internationally, the IMF’s forecasts for the UK stand out, downgraded by just below a full share level because the autumn, and now anticipated to shrink by 0.6% this yr.

The IMF attributes this to speedy rate of interest rises, tax rises, greater borrowing prices for companies and nonetheless excessive home vitality costs. The Fund mentioned the UK was having to navigate a really complicated atmosphere, and that because the Autumn Statement British coverage was now “on the right track”.

But if over the approaching yr this forecast proves to be right, it raises questions as to why the UK could have missed out on a greater world financial backdrop. The UK is now the one shrinking financial system out of 15 revealed on this report, with even sanctions-hit Russia now forecast to develop this yr.

The shadow chancellor Rachel Reeves mentioned the figures confirmed the UK “lagging behind our peers”. The Chancellor Jeremy Hunt mentioned the figures confirmed “we are not immune to pressures hitting nearly all advanced economies”.

The Bank of England will publish its new forecast for the UK financial system later this week, alongside an anticipated additional rise in rates of interest.

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The IMF’s bleak image for the UK comes after Mr Hunt warned it was “unlikely” that there can be room for any “significant” tax cuts within the Spring Budget.

The chancellor, who has been beneath strain from some in his celebration to chop taxes to stimulate the financial system, mentioned {that a} pledge to halve the speed of inflation “is the best tax cut right now”.

Inflation, which is the speed at which costs rise, hit 10.5% within the 12 months to December, near a 40-year excessive.

Prime Minister Rishi Sunak has pledged to halve inflation by the top of the yr, though some economists have mentioned worth rises will gradual with out authorities insurance policies, on account of commodity costs and delivery prices lowering.

Andrew Bailey, the governor of the Bank of England, mentioned inflation is prone to fall quickly this yr as vitality costs fall, however has warned a UK recession continues to be on the playing cards.

While the IMF has predicted the UK financial system to contract, it forecast financial progress of 1.4% within the United States, 0.1% in Germany, 0.7% in France, 0.6% in Italy, 1.8% in Japan and 1.5% in Canada.

Mr Hunt highlighted that Mr Bailey had mentioned that any UK recession was “likely to be shallower than previously predicted”, however did add the IMF’s figures “confirm we are not immune to the pressures hitting nearly all advanced economies”.

“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,” he added.

The Treasury mentioned since 2010, the UK had grown quicker than France, Japan and Italy and that because the EU referendum in 2016, it had grown at “about the same rate as Germany”.

“Cumulative growth over the 2022-24 period is predicted to be higher than Germany and Japan, and at a similar rate to the US,” a spokesman mentioned.

Economic forecasters should not all the time 100% proper relating to predicting the longer term. The IMF has mentioned its forecasts for progress the next yr in most superior economies just like the UK’s have as a rule been inside about 1.5 share factors of what truly occurs.

The IMF didn’t point out Brexit in its report as an element for the UK not performing in addition to others. Today marks three years because the UK left the EU.

It mentioned the rise in central banks internationally placing up rates of interest to attempt to curb inflation and the battle in Ukraine continued to “weigh on economic activity”.

But it mentioned China reopening its financial system from Covid restrictions “paved the way for a faster-than-expected recovery” globally.

Overall, the IMF estimated world inflation handed its peak and can fall from 8.8% final yr to six.6% in 2023 and 4.3% in 2024.