UK Economy to Shrink Further than Russia

The IMF has warned the UK economy will shrink further than any other developed state. We examine the outlook for households in the bleak economic picture.

The UK economy is forecasted to perform worse than any other developed nation, including Russia, according to the latest report from the International Monetary Fund (IMF). The IMF predicts that the UK’s GDP will contract by 0.6 percent in 2023, downgraded from its previous projections of 0.3 percent growth this year and 0.6 percent growth next year. With recent economic downturn and rising inflation following the Ukraine war and global events, the worsening forecasts will come as a concern to households across the UK.

The IMF attributes the downgrade to “tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets.” The UK’s dependency on natural gas, which has driven up energy prices following Russia’s invasion of Ukraine, and the slow return of employment to pre-pandemic levels, as well as increasing interest rates, were also noted as factors in the poor forecast.

Chancellor Jeremy Hunt acknowledged the forecast, saying the UK is “not immune to the pressures hitting nearly all advanced economies.” Despite the short-term challenges, he pointed to the UK’s long-term prospects, including outperforming many forecasts last year and a predicted growth rate faster than Germany and Japan over the coming years.

Shadow chancellor, Rachel Reeves did not share Mr Hunt’s view and said the figures showed the UK “lagging behind our peers”.

Global economic picture

In contrast, the IMF upgraded its growth projections for Italy and Germany, which are now expected to grow more than the UK this year. The global economy is expected to expand by 2.9 percent in 2023, 0.2 percentage points faster than previously forecasted in October.

China’s decision to open up its economy and abandon its zero-COVID policy also contributed to the upgrade of its GDP projection from 4.4 percent to 5.2 percent this year.

The US is expected to grow by 1.4 percent, higher than its previous projection of 1 percent. Germany, previously forecasted to shrink by 0.3 percent, is now expected to grow by 0.1 percent.

Despite the improvement in the global economy, the IMF warns of adverse risks that could worsen the recovery, such as severe health outcomes in China, escalation of the conflict in Ukraine, and tighter global financing conditions leading to debt distress.

The IMF’s latest report is a further blow to the UK’s economic reputation, as most other countries around the world saw their forecasts upgraded while Britain’s outlook was downgraded. The UK government’s plans to raise taxes and reduce the budget deficit in coming years have also been criticised, as they would result in increased costs for businesses and households while they continue to struggle with the cost of living crisis.

Some commentators have noted these are currently forecasts and subject to change. Paul Johnson, director of the Institute for Fiscal Studies, said that the IMF’s forecasts were not always right, and he noted the fund was “actually being more optimistic than it was a few months ago”.

Forecasts from the Bank of England due later this week are likely to be more positive than they were two or three months ago, he added.

“My best guess is that the economy will be broadly stagnant this year. That we’re not going to get much in the way of growth but we’re not going to have a deep recession either,” he told the BBC’s Today programme.

“Now that’s not great, particularly as we should be bouncing back more strongly from Covid and particularly as we’ve not been growing terribly well for the last decade and more.”

Final thought

The IMF’s forecast will be a worry to many, with the cumulative affect of global events impacting the UK economy from multiple sides. Given the comparative downturn to leading European states, the impact of Brexit will also come into the spotlight.

Following the cooling of markets after Liz Truss’s premiership, the Prime Minister and Mr Hunt will feel pressured to steer the UK economy onto a path of growth and prosperity. With a general election in two years, this Conservative Government must pull off the correct economic moves to ensure the UK thrives.

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