IMF Predicts UK Economic Decline Among G-7 Countries

The International Monetary Fund has downgraded its outlook for the UK economy, even as it becomes more optimistic about global growth. This is due to the continued uncertainty surrounding Brexit, which is weighing on the country's economic prospects.

The OECD released a new forecast on Monday evening which predicts that the UK will be the only advanced economy to contract in 2023, by 0.6%. This is 0.9 percentage points lower than the OECD's previous estimate.

The outlook for Russia is even worse, with a 0.3% decline forecasted.

IMF Head of Research Pierre-Olivier Gourinchas said there are three main reasons for the UK's economic slowdown: the country's high exposure to natural gas, with higher market prices being passed on to consumers; employment remaining below its pre-pandemic level despite a very tight labor market, resulting in less production; and sharp monetary tightening.

The group revised its 2024 outlook for the U.K. upward, from an expansion of 0.6% to 0.9%.

The International Monetary Fund (IMF) has forecasted that the United States will experience 1.4% growth in 2023, while the euro area will see 0.7% growth. Additionally, the IMF predicts that Japan will have 1.8% growth and Canada will see 1.5% growth.

The International Monetary Fund has raised its outlook for the global economy by 0.2 percentage points from its last report in October, to 2.9%.

The IMF says that while the global economy is still weak by historical standards, factors including China’s Covid-19 reopening, a robust labor market and household consumption in the U.S., and better-than-expected adaptation to the energy crisis in Europe have brightened the picture.

The report noted that in the U.K. and other European countries, inflation remains high and fiscal and monetary policies are tight, which will put pressure on household budgets.

Preliminary figures released on Tuesday showed that the euro zone avoided a contraction in the fourth quarter of 2022, with 0.1% growth compared to 0.3% growth in the third quarter. However, some economists still believe that the bloc will enter a recession.

The UK's GDP is estimated to have fallen by 0.3% in the third quarter, and fourth quarter results are widely expected to show another decline.

Goldman Sachs and KPMG have both released pessimistic projections for the U.K., highlighting the squeeze on disposable income and the potential deterioration of the labor market as key concerns.

The United Kingdom is facing some challenges, including high rates of long-term sickness and a reduction in trade because of Brexit.

Since the IMF last prepared a forecast, the U.K. has also been through the turmoil of former Prime Minister Liz Truss’ budget. This budget was pitched as a radical plan to boost growth but was quickly reversed after sparking chaos in financial markets.

In November, the Bank of England said it expected a 1.5% decline in U.K. GDP during 2023. However, it has since said that a slightly improved inflation outlook and short-term fiscal support packages would improve the picture. The Bank is likely to provide an update on its monetary policy in its announcement on Thursday.

Paul Johnson, director of research group the Institute for Fiscal Studies, said that the IMF's U.K. forecast had "deteriorated since Autumn" and that it was "hard to see what was driving" it.

The IMF has released its latest update on the global economy, and it paints a fairly bleak picture. According to the report, the coming year will be tough, with a fall in living standards and a stagnant economy. However, there is little new in this update, and it largely reaffirms what we already know.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said in a note that alongside a labor shortage and over-exposure to energy retail prices, the U.K.'s unique challenges included prohibitively high mortgage rates. She noted that these factors could lead to a slowdown in the U.K.'s economy.

"There's a chance the U.K. could do better than the IMF is predicting, given that other bodies have upgraded their expectations in recent months," she said.

The market is likely to remain sensitive to interest rate and inflation readings until the economy shows clear signs of improvement.

British Finance Minister Jeremy Hunt responded to the IMF forecast, saying that short-term challenges should not obscure the UK's long-term prospects. He noted that the UK outperformed many forecasts last year, and if the country sticks to its plan to halve inflation, it is still predicted to grow faster than Germany and Japan over the coming years.

Last week, he gave a speech to tech bosses urging them to be more optimistic about the U.K. economy.