EconomyJan 31 2023

UK only major economy to shrink this year, IMF forecasts

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UK only major economy to shrink this year, IMF forecasts
Carolyn Mendelsohn/BloombergShoppers on a pedestrianised shopping street in the centre of Bradford, UK, on Saturday, July 2, 2022

The UK economy is expected to shrink by 0.6 per cent in 2023, and is the only leading economy predicted to fall into a recession this year.

In an update released yesterday (January 30) the International Monetary Fund readjusted its economic forecast for the UK with a 0.9 percentage point downward revision from October. 

The update reflects tighter fiscal and monetary policies as well as continuously difficult financial conditions and the still-high energy retail prices faced by UK households.

The forecasted recession facing the UK is in contrast to other leading economies as well as emerging and developing economies. 

Globally, economies are expected to see a slowdown in growth this year before rebounding in 2024, according to the IMF. 

The war in Ukraine and the fight against inflation globally are the two key factors impacting this.

However, the reopening of China’s economy is forecast to have a positive impact on growth globally following the country’s easing of Covid-19 restrictions. 

The Euro area is forecast to see growth of 0.7 per cent, while the United States and Canada are expected to see growth of 1.4 per cent and 1.5 per cent respectively in 2023.

Economic growth in China is expected to reach 5.3 per cent this year, while Russia is expected to grow by 0.3 per cent despite the economic sanctions currently imposed on it.

The IMF noted that 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. 

Despite the BoE’s efforts to tame inflation, it remains at an almost 40-year high at 10.5 per cent and household budgets remain stretched as a result. 

Elsewhere however, the IMF noted that pent-up demand fuelled by excess private savings from the pandemic fiscal support, the still-tight labour market and solid wage growth mean that it is plausible that the economic scenario facing the UK may not be quite as gloomy as predicted.

It also noted that faster disinflation could pave the way for a softer economic landing.

Looking forward to 2024, the IMF has forecast that the UK economy will reenter a period of growth with a rate of 0.9 per cent for the year. 

Commenting on the forecast, IMF director of research, Pierre-Olivier Gourinchas noted that China and India will account for 50 per cent of global growth in 2023 while the total global growth rate is expected to be 2.9 per cent this year.