The UK will retain its position as the world’s worst major economy this year, according to forecasts from the International Monetary Fund, which warned that global inflation will remain higher for longer.
The fund said that despite the bright prospects this year, the UK will record a 0.3 per cent contraction in growth in 2023. This is a 0.3 percentage point upgrade to its forecast made at the start of the year, but it means Britain is the second economy to contract with Germany this year. general.
The fund’s outlook is in line with those from the Bank of England and the Office for Budget Responsibility, the official forecaster, who have revised their forecasts for the year, but expect growth to remain weak by historical standards along with inflation and the cost of living. .
The fund said that growth in the United Kingdom is expected to accelerate by 1 percent next year, up 0.1 percentage point from January, and similar to rates in Japan and the United States. Growth accelerated to 4 percent in 2022, the second-highest among economies in the rich world after Spain, but the UK is one of the few major economies to remain below pre-pandemic size.
The International Monetary Fund cut its forecast for global growth by 0.1 percentage point to 2.8 percent this year and 3 percent next year, as it expected inflation to remain persistently high in major economies. It said growth over the next five years would be the weakest since the early 1990s.
“The haze surrounding the global economic outlook has intensified,” said Pierre-Olivier Gourenchas, chief economist at the International Monetary Fund. He added, “Inflation is more steady than expected even a few months ago. While global inflation has declined, that mostly reflects the sharp reversal in energy and food prices. But core inflation, which excludes energy and food, has not yet peaked in many countries.”
Germany will have the second lowest growth rate among major economies this year, down 0.1 percent, while the 20-country eurozone will grow by 0.8 percent on average. The United States is expected to expand 1.6 percent and Japan 1.3 percent.
Core inflation rose to an all-time high in the eurozone of 5.5 percent in the United States, more than double the Federal Reserve’s target rate. He points out that underlying inflationary pressures in rich economies remain strong despite low headline inflation rates.
The International Monetary Fund believes global core inflation will fall to 5.1 percent by the end of the year, up 0.6 percentage points from its forecast in January.
Gorinchas said the strength of inflationary pressures, caused in part by rising wages and the still-low unemployment rate, may force central banks to extend their monetary tightening in the coming months. “This may necessitate further tightening of monetary policy or staying tighter for a longer period than currently expected,” he said.
The International Monetary Fund has highlighted the UK’s double-digit inflation as an increasing pressure on household budgets. He also pointed to the panic selling of UK bonds in September after the mini budget as a warning about the fragility of financial stability after the collapse of three US banks last month.
Gorinchas said investors and financial markets are becoming “complacent” with the risks posed by rapidly rising interest rates, making money more expensive and hurting the value of assets such as government debt held by investors. The International Monetary Fund said further banking disruptions are one of the “big risks” haunting the global economy and could reduce the supply of credit to households and businesses.
The side effects of last year’s sharp tightening in monetary policy are starting to play out on the financial sector, as we have warned over and over again, they may. Maybe it was a surprise that it took so long, Gorinchas said.