UK economy set to shrink by 0.3% in 2023, says IMF

Chancellor Jeremy Hunt’s efforts to revitalise the UK economy have not been sufficient to raise it from near the bottom of the global league table this year, according to forecasts published by the IMF on Tuesday.

In its twice-yearly World Economic Outlook, the fund predicted that the UK economy would shrink by 0.3 per cent in 2023, even after a significant upgrade to the forecast of a contraction of 0.6 per cent in January.

With a worse outlook than Hunt expected even into the medium term, the IMF forecasts showed that the UK was set to miss his two main fiscal rules — to have both a falling public debt burden and borrowing below 3 per cent of gross domestic product by 2028.

Among all other large advanced nations, only Germany was expected to shrink, with output in Europe’s largest economy forecast to slip by 0.1 per cent this year.

Some smaller European economies were predicted to do worse than the UK this year because they suffered more from the surge in wholesale gas prices last year.

They included Sweden, the Czech Republic and Estonia but the IMF expected all three to expand more in the rest of 2023, since their main problems hit at the end of 2022.

Comparing the fourth quarter of 2023 with a year earlier, including only performance within 2023, the UK economy was expected to shrink 0.4 per cent, worse than any other advanced economy apart from Denmark.

Russia’s growth forecast of 0.7 per cent in 2023 was stronger than that of Britain, but unlike in January, the IMF did not single out the UK for criticism. Pierre-Olivier Gourinchas, the fund’s chief economist, grouped it together with the eurozone as an area of the world where “the slowdown is concentrated”.

Hunt will attend the IMF and World Bank spring meetings in Washington DC this week, where he is set to reiterate his view that “the declinists are wrong and the optimists are right” about the UK’s economic prospects.

The fund’s forecasts do not support this view. In a nod to the recent banking turmoil, IMF analysts noted that the crisis that followed then chancellor Kwasi Kwarteng’s “mini” Budget last year were an example of the “significant vulnerabilities [that] exist both among banks and non banks” around the world.

Hunt will meet other finance ministers and central bank governors at a time when he hopes the UK will be out of the spotlight.

At the fund’s last gathering in October 2022, Kwarteng had to answer questions from peers about the dangers of contagion from the crisis sparked by his announcement of £45bn of unfunded tax cuts.

Hunt will receive some reassurance from the IMF data. After predicting a contraction of 0.3 per cent this year, it expects growth of 1 per cent in 2024, rising to 1.5 per cent by 2028.

This forecast was significantly weaker, however, than those drawn up by the Office for Budget Responsibility, the fiscal watchdog, which underpinned last month’s Budget.

The IMF’s more sober outlook was also reflected in its predictions for the public finances, which showed a deficit of 3.7 per cent of GDP by 2028 compared with the OBR’s forecast that it would fall to 1.7 per cent of GDP.

That would push borrowing above Hunt’s commitment to keep it below 3 per cent of GDP.

Higher borrowing in the IMF’s forecasts would also stop the public debt burden from falling. Instead of public sector net debt as a share of GDP falling by 2027-28, the IMF expects the net debt burden — measured slightly differently — to stabilise above 100 per cent of GDP.

Responding to the IMF’s forecasts, Hunt said: “Thanks to the steps we have taken, the OBR says the UK will avoid recession, and our IMF growth forecasts have been upgraded 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.”

Source: Economy - ft.com