LAST UPDATE | 31 Jan 2023

THE UK IS set to be the only economy in the G7 to experience a recession this year, according to the International Monetary Fund (IMF).

In a quarterly update to its World Economic Outlook, the IMF forecast that the British economy will contract by 0.6% this year, 0.9 percentage points worse than its previous forecast last October.

The fund said the forecast reflected “tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets” in the UK.

It puts the UK in a worse position than its G7 counterparts and makes it the only country across advanced and major emerging economies expected by the IMF to suffer a year of declining GDP. 

Even Russia, which is under pressure from a raft of sanctions over its invasion of Ukraine, is predicted by the fund to see a growth of 0.3% this year.

Among the other G7 nations, the IMF’s predictions show growth of 1.4% in the United States, 0.1% in Germany, 0.7% in France, 0.6% in Italy, 1.8% in Japan and 1.5% in Canada.

The IMF also said it believes inflation has passed its peak and is expected to fall from 8.8% last year to 6.6% this year. However, it warned that rising prices and the impacts of actions taken to curb inflation would continue to weigh on the economy.

“Consumer confidence and business sentiment have worsened. With inflation at about 10 percent or above in several euro area countries and the United Kingdom, household budgets remain stretched,” it said.

“The accelerated pace of rate increases by the Bank of England and the European Central Bank is tightening financial conditions and cooling demand in the housing sector and beyond.”

Chief economist for the IMF, Pierre-Olivier Gourinchas, explained there were three key factors driving the UK’s economic outlook.

“First, there is exposure to natural gas… we’ve had a very sharp increase in energy prices in the UK,” Gourinchas said. “There is a larger share of energy that is coming from natural gas, with a higher pass-through to final consumers.

“The UK’s employment levels have also not recovered to pre-pandemic levels. This is a situation where you have a very, very tight labour market but you have an economy that has not re-absorbed into employment as many people as it had before. That means there is less output, less production.

“The third is that there is a very sharp monetary tightening because inflation has been very elevated, that’s a side effect of this high pass-through of energy prices.”

However, the IMF did upgrade its outlook for UK growth in 2024 to 0.9%, up from the 0.6% expansion previously forecast.

In a statement this afternoon, British Chancellor Jeremy Hunt stressed many forecasts were overly-pessimistic about the UK economy last year.

“Short-term challenges should not obscure our long-term prospects – the UK outperformed many forecasts last year, and if we stick to our plan to halve inflation, the UK is still predicted to grow faster than Germany and Japan over the coming years,” he said.

It follows efforts by Hunt last week to talk up the UK economy and its growth prospects in his first major speech in the post, declaring that “declinism about Britain was wrong in the past and it is wrong today”.

The UK is currently experiencing a raft of public sector strikes over pay, with inflation still standing at more than 10% in the country. 

It comes after a period of instability in the country, which saw three prime ministers last year.

Last September, a £43 million mini-budget unveiled by Liz Truss and her chancellor Kwasi Kwarteng last September which sent markets into turmoil and caused the Bank of England to step in.

Kwarteng was subsequently sacked, and Truss resigned after 44 days in office. 

In November, newly-appointed chancellor Hunt announced a wave of tax hikes and spending cuts in his autumn statement and declared that the UK’s economy was in recession, adding that the measures were needed to bring financial stability.

Exactly three years since the UK left the European Union, the impact of Brexit has also had a negative impact on the country’s economy and created political instability in Northern Ireland. 

Additional reporting from the Press Association