The UK economy is expected to shrink this year and will be at the back of the leading G7 countries at a time when a fresh outbreak of financial upheaval threatens the slowing global recovery, the International Monetary Fund has warned.
Emphasising the growing risks of a hard landing for developed countries, the Washington-based body pointed to the UK and the euro area as being particularly affected by rising energy costs and higher inflation.
The IMF said global growth could slow to just 1% in the event that the recent problems at banks in the US and Switzerland were an early warning of a severe financial crisis.
“The fundamental question confronting market participants and policymakers is whether these recent events are a harbinger of more systemic stress that will test the resilience of the global financial system – a canary in the coal mine – or simply the isolated manifestation of challenges from tighter monetary and financial conditions after more than a decade of ample liquidity,” the IMF said.
Based on its central assumption that a financial meltdown would be avoided, the IMF revised up slightly its estimate of UK growth this year from the -0.6% pencilled in three months ago but still expected the economy to contract by 0.3%.
The chancellor, Jeremy Hunt, said the IMF had upgraded the UK by more than any other G7 country. “The IMF now say we are on the right track for economic growth. By sticking to the plan we will more than halve inflation this year, easing the pressure on everyone.”
Rachel Reeves, Hunt’s Labour counterpart, said the IMF forecasts showed how far Britain continued to lag behind on the global stage. “This matters not just because 13 years of low growth under the Tories are weakening our economy, but because it’s why families are worse off, facing a Tory mortgage penalty and seeing living standards falling at their fastest rate since records began,” the shadow chancellor said.
The Liberal Democrat MP Layla Moran said the UK was the only developed country where businesses were facing extra costs and red tape as a result of Brexit.
After being the fastest-growing economy in 2022, the UK – along with Germany – is one of only two G7 countries predicted to contract in 2023, according to the IMF’s world economic outlook (WEO).
The fund’s economic counsellor, Pierre-Olivier Gourinchas, said the UK would have no early respite from its cost of living crisis, which has taken the annual inflation rate to 10.4%, and only a modest bounceback to 1% growth next year, when the general election is expected to be held.
“We do continue to predict a recession in 2023 on the back of the fairly sharp impact of rising energy prices, monetary policy tightening and some tightening of financial conditions,” Gourinchas said. “Our overall assessment is that this is going to be a challenging year for the UK but growth is going to increase in 2024.”
The IMF said it expected global growth to slow from 3.4% in 2022 to 2.8% this year – with the risks of an even sharper easing if last month’s problems affecting regional US banks, such as the collapsed Silicon Valley Bank and Switzerland’s recently rescued Credit Suisse, prove to be symptomatic of a more widespread malaise.
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Gourinchas said that on the surface, the global economy seemed poised for a gradual recovery after the setbacks caused by the pandemic and Russia’s invasion of Ukraine. “Below the surface, however, turbulence is building, and the situation is quite fragile, as the recent bout of banking instability reminded us.”
He said the IMF backed central banks in their determination to bring inflation back down from the highest level in four decades, but admitted that higher interest rates could expose underlying problems in the financial system.
“We are therefore entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner,” he added.
The WEO notes that the leading forces that affected the global economy in 2022 – the ratcheting-up of interest rates, the limited space for governments to cut taxes or raise public spending and historically high debt levels, and evidence of global fragmentation into rival blocs – had been overlaid and were interacting with financial stability concerns.
“A hard landing – particularly for advanced economies – has become a much larger risk,” the report said. “Policymakers may face difficult trade-offs to bring sticky inflation down and maintain growth while also preserving financial stability.”
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