The UK will escape a recession this year, the IMF said on Tuesday, adding that the country’s economy had been “buoyed by resilient demand in the context of declining energy prices”.
But the fund cautioned that Britain risked being stuck with persistent inflation unless interest rates stayed high.
“Economic activity has slowed significantly from last year and inflation remains stubbornly high,” the fund said in the periodic stocktaking of the UK economy known as the Article IV report.
It added: “The outlook for growth, while improving somewhat in recent months, remains subdued.”
The IMF predicted in January that the UK economy would shrink by 0.5 per cent between the final quarter of 2022 and the last quarter of this year. It was still forecasting a recession last month.
But, in a significant upgrade on Tuesday, it said the economy was now set to expand 0.4 per cent in 2023, reflecting stronger wage growth, more supportive fiscal policy and the easing of global energy prices and supply chain blockages.
The fund expects gross domestic product to grow 1 per cent in 2024 and to average 2 per cent in 2025 and 2026.
Survey data released on Tuesday confirmed the picture of consumer-driven growth combined with wage rises that put pressure on prices.
S&P Global’s flash UK composite purchasing managers’ index edged down from April’s high of 54.9 to 53.9 in May. But S&P said it still signalled a “solid expansion”, with resilient demand for travel, leisure and hospitality offsetting weakness in the manufacturing sector.
UK chancellor Jeremy Hunt said the IMF upgrade reflected the UK government’s “action to restore stability and tame inflation” and showed that the country’s long-term growth prospects were now “stronger than in Germany, France and Italy”.
But the IMF warned inflation was set to remain above the Bank of England’s 2 per cent target for six months longer than it had forecast last month, until mid-2025.
Cautioning against “premature celebrations”, the fund noted the risk that high energy prices would be replaced by more persistent price and wage pressures that could lead inflation to “plateau” at an elevated rate.
The IMF added that if inflation remained high, the authorities would need to engineer a sharper downturn to bring it under control.
“Some further monetary tightening will probably be needed and rates may have to remain higher for longer,” it said.
The fund urged the Bank of England to focus on underlying measures of inflation, such as wage growth and services inflation, rather than the headline rate, which it said was bound to drop on lower energy prices.
It also warned the UK government to avoid a pre-election spending splurge that could complicate the BoE’s task of bringing down inflation.
“Fiscal policy should stay the course by adhering to the announced consolidation path,” the fund said.
But it argued that in the medium term the UK government needed to overhaul its fiscal plans to take account of intense pressures on public services and the investment needed to boost the country’s long-term growth.
Current spending plans implied big cuts to some government departments, even before factoring in extra funding to address challenges in the NHS and social care, invest in the green transition, and boost public sector pay, the IMF said.
To accommodate such “critical needs”, it advised that Britain should replace the so-called triple lock that ensures that pension payments rise in line with inflation, average earnings or by 2.5 per cent each year, whichever is higher.
It also urged the government to strengthen carbon taxation and reform property taxes by moving away from the stamp duty system on home purchases, which it said constrained housing and labour mobility.
Source: Economy - ft.com
