The International Monetary Fund has upgraded its outlook for the UK, forecasting growth this year instead of recession and no longer consigning the economy to the worst performing in the G7.
The IMF thinks that the British economy will expand by 0.4 per cent this year, a revision from the 0.3 per cent contraction that it forecast in April.
It is the second consecutive upward revision from the Washington-based fund in as many months, and means that the UK will not be the slowest major economy in the world in 2023. Germany, Europe’s largest economy, is on track to stagnate this year, making it the worst performing in the G7.
The IMF has revised up its forecasts on the back of government support measures and falling global energy prices, which have helped boost consumer spending, which has been stronger than expected this year. Reduced uncertainty around the post-Brexit trading environment in Northern Ireland has also helped lift business confidence, the IMF said.
Growth is expected to accelerate by 1 per cent next year, as inflation slows, and then average in the 2 per cent range in 2025 and 2026, the IMF said. Officials, however, warned that inflation would only fall back to 2 per cent in three years’ time and said there was a danger that prices could remain higher for longer.
The figures come after the fund’s officials concluded a two-week mission in the UK to assess the state of the economy before its regular annual assessment report.
“Buoyed by resilient demand in the context of declining energy prices, the UK economy is expected to avoid a recession and maintain positive growth in 2023,” the fund said.
Jeremy Hunt, the chancellor, said the IMF forecast was a “big upgrade” for the UK’s growth prospects, and “credits our action to restore stability and tame inflation”.
He added: “It praises our childcare reforms, the Windsor framework and business investment incentives. If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy — but the job is not done yet.”
The upgrade is in line with other large institutions who have also scrapped their projections for a recession in 2023, including the Bank of England.
The IMF has come under fire from the government and Tory MPs for consistently under-estimating the resilience of the UK economy after Brexit. The fund had initially pencilled in a 0.6 per cent contraction for this year in January, with its forecasts being slightly less pessimistic than the Bank but under-shooting projections from the Office for Budget Responsibility.
IMF officials have conducted an internal review of their UK forecasts and found that they have not been considerably worse than other institutions given the high degree of uncertainty around all growth projections following the war in Ukraine.
The fund praised the government and the Bank for acting “decisively to fight inflation”, pointing out that the central bank was among the first to begin raising rates in late 2021.
However, inflation has proven more persistent than hoped this year, as food prices have hit record highs. Fresh inflation figures out tomorrow are expected to show the first big drop in consumer prices to about 8.4 per cent from the 10.1 per cent recorded in March.
The IMF said it now expects inflation to fall to the Bank’s 2 per cent target by the middle of 2025, six months later than it forecast in April.
The fund said there was a risk that the price of goods and services and wage growth would keep inflation uncomfortably high this year. “Should such upside risks to inflation materialise, headwinds to growth would likely be intensified by tighter demand-management policies needed to combat inflation,” the IMF said.