Britain will emerge as economically the weakest of the world’s richest countries, the only G7 economy to contract this year, according to forecasts by the International Monetary Fund (IMF). The world’s economic watchdog has cut its expectations for the UK GDP again, now pencilling in a 0.6 per cent contraction in 2023, down from 0.3 per cent growth prediction last October.
The downgrade means Britain is falling behind its G7 peers. The IMF believes the American, French and German economies will grow 1.4 per cent, 0.7 per cent and 0.1 per cent respectively this year. Rising inflation, still running above 10 per cent and more than five times the Bank of England’s two per cent target, has eroded household spending power quickly, squeezing demand and bringing down the economy.
The Bank of England’s (BoE) nine successive interest rate rises to tame price increases has brought more misery on consumers and businesses, further weakening the economy. BoE has put borrowing costs 50 basis points higher to four percent, a post-financial crisis high.
“Tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets” has choked UK GDP, the IMF said in its latest global economic outlook released on January 31. A string of better-than-expected data recently had boosted confidence in the underlying strength of the UK economy.
Output unexpectedly rose 0.1 per cent in November, beating expectations of a small contraction and cutting the odds on the UK falling into a technical recession — two quarters of contraction — at the very end of 2022. The IMF also believes Britain had the fastest growth in 2022, although that was driven by the country suffering a sharper hit from the Covid-19 pandemic.
However, the UK is still the only G7 country with an economy smaller than it was before the pandemic. Chancellor Jeremy Hunt wasn’t overly concerned about the IMF’s gloomy forecasts, saying they “should not obscure our long-term prospects”.
Hunt, who a week ago warned against British economic decline, added: “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.”
The IMF did lift its outlook for UK growth in 2024 to 0.9 per cent, up from 0.6 per cent expansion previously forecast. The Washington-based organisation also bumped its global GDP growth expectations to 2.9 per cent from 2.7 per cent.
There does of course remains a possibility that the British economy will do better than the IMF’s prediction of 0.6 per cent fall, judging by its prediction in 2021. The IMF made four GDP projections then: in January, April, July and October. The last three of these were all pessimistic than the average and ended up missing the actual outcome to a wider margin.
The four IMF projections were out by an average of 1.7 percentage points in 2021. This was worse than average of a sample of 34 independent forecasters collected by the Treasury which missed by an average of 1.55 percentage points.
The Treasury’s sample includes major banks such as HSBC, Goldman Sachs and JP Morgan, as well as bodies such as the OECD and the Centre for Economics and Business Research. It should also be kept in mind that the IMF regularly revises its forecasts. Just about a year ago it said the UK would grow 2.3 per cent in 2023.
Furthermore, new figures out from the lobby group the Institute of Directors (IoD) on January 31 indicated business leaders’ optimism in the UK economy has rebounded sharply. The IoD said confidence among its membership jumped to 30 points over the last month, although its index is still into the negative at minus 28 points. (The writer is our foreign correspondent based in the UK)