Britain is the only leading economy likely to slide into recession this year, the IMF said on Tuesday, predicting that UK household spending would falter under the weight of high energy prices, rising mortgage costs and increased taxes.
The fund upgraded its forecasts for most leading economies and said the global outlook had brightened. But it identified the UK as an exception and said the British economy would shrink by 0.5 per cent between the final quarter of 2022 and the final quarter of this year.
Even Russia’s economy is now likely to outpace the UK’s, growing 1 per cent this year, according to the IMF forecasts.
Pierre-Olivier Gourinchas, chief IMF economist, said the UK could expect a “sharp correction” in 2023, adding that the country faced “a quite challenging environment”.
The IMF prediction that UK 2023 output will contract by 0.5 per cent represents a downgrade of its October forecast of 0.2 per cent growth for this year. By contrast, the fund upgraded its global economic forecast over the same period by 0.5 percentage points.
Gourinchas said eurozone economies had been “surprisingly resilient”, while the US had a “narrow path” to avoid recession, with inflation falling and only modest increases in unemployment.
The IMF also thinks Beijing’s decision to ditch its zero Covid policy will help China reach 5.9 per cent growth by the end of this year, more than double the 2022 rate of 2.9 per cent.
UK chancellor Jeremy Hunt said the IMF forecast showed that the UK was “not immune to the pressures hitting nearly all advanced economies”. He added that Britain outperformed many forecasts last year and was on track to outgrow Germany and Japan in coming years if it met its goal of halving inflation.
But Gourinchas said UK consumers and companies found themselves unusually exposed to high energy prices. He said borrowers would also be hit by higher mortgage rates this year as the Bank of England continued to raise interest rates to counter inflation that, while apparently past its peak, was still 10.5 per cent in December.
The Bank of England is expected to increase interest rates by 0.5 percentage points to 4 per cent on Thursday.
Gourinchas also noted difficulties owing to Britain’s labour market. Other European countries have experienced an increase in people seeking work following the height of the pandemic — helping keep a lid on price increases and boosting growth.
This has not been true to the same extent of the UK, which has been affected by greater reluctance to return to the labour force as well as post-Brexit labour shortages.
The BoE is set to revise its own forecasts on Thursday, and is likely to produce estimates close to the IMF’s. That would be an improvement from the bleak outlook the central bank delivered in early November at a time wholesale gas prices were far higher than today.
In November, the BoE forecast that gross domestic product would fall 1.9 per cent between the fourth quarter of 2022 and the equivalent period of this year.