High levels of inflation will persist longer in Britain than in almost all other advanced economies, the IMF warned as it took aim at Kwasi Kwarteng’s unfunded tax cuts.
UK inflation will also be the highest in the G7 at the end of 2023, while in the 19-member eurozone, only Slovakia would have a higher inflation rate by the end of 2023, the fund predicted on Tuesday, laying the blame squarely at the feet of the chancellor.
Kwarteng, who is set to travel to Washington this week for the IMF annual meetings, faces the accusation that his tax policies will force the Bank of England to raise interest rates to offset the inflationary pressure.
Instead of boosting growth, the IMF made it clear it thought the government’s policies ran a serious risk of provoking a deeper downturn once inflation had stayed too high for too long.
In its twice-yearly World Economic Outlook, the fund said Kwarteng’s fiscal package came too late for inclusion in its forecasts, but it was “complicating the fight against inflation”.
Its UK forecast showed growth slowing from 7.4 per cent in 2021, to 3.6 per cent in 2022 and only 0.3 per cent in 2023. The IMF said it would have lifted its estimate for the 2023 growth rate “somewhat” if it had known about the “mini” Budget earlier, but that would also have raised inflation.
The fund forecast that UK inflation would remain high at 6.3 per cent by the end of 2023, more than every member of the eurozone apart from Slovakia.
In its Global Financial Stability Report, the fund also noted that financial markets had taken a dim view of Britain’s inflation prospects, with futures markets predicting there was a 70 per cent chance of UK inflation averaging more than 3 per cent a year during the next five years.
But as it published the report, the IMF praised the UK government for seeing the error of its ways and beginning to take action to rectify the situation.
Pierre-Olivier Gourinchas, IMF chief economist, told the Financial Times that since the “mini” Budget had received a drubbing by both the IMF and the financial markets, “the good news there is that the UK government has really sent all the right signals about having their Budget costed by OBR . . . so all of these things are going in the right direction”.
But he added that did not make it easy for the government. “Markets are looking at these elevated debt levels, they’re seeing interest rates rising, they’re thinking, ‘well, it’s going to be harder to sustain elevated debt levels [and] debt should be coming down’,” Gourinchas said.
Countries should not follow the example of the UK, he added. “Doing otherwise will only prolong the fight to bring inflation down, risk de-anchoring inflation expectations, increase funding costs, and stoke further financial instability, complicating the task of fiscal as well as monetary and financial authorities, as recent events illustrated.”
The criticism marks a continuation of the IMF’s very public dressing down of prime minister Liz Truss’s economic strategy. In the wake of the fiscal statement late last month, the IMF issued a highly unusual statement, saying it was “closely monitoring recent economic developments in the UK” and that it did “not recommend large and untargeted fiscal packages”.
The IMF’s comments came as it issued global forecasts highlighting the risk of the world economy sliding into recession with a global growth forecast for next year that is the lowest since 2001, apart from the year of the global financial crisis and the Covid-19 crisis.
It said there was a string of challenges facing the global economy, ranging from China’s zero-Covid policy to the need to raise interest rates to battle inflation and the war in Ukraine pushing up food and energy prices.
Source: Economy - ft.com
