The International Monetary Fund (IMF) said it is not expecting the UK to enter a recession this year, in a dramatic upgrade to its previous forecast.
In an update to recent forecasts, it said: “Buoyed by resilient demand in the context of declining energy prices, the UK economy is expected to avoid a recession and maintain positive growth in 2023.”
But it said the outlook for growth remains “subdued”, forecasting growth of 0.4 per cent this year.
In April, it forecast that UK output was expected to contract by 0.3 per cent.
The IMF said the change reflects “higher-than-expected resilience” in both demand and supply, referencing improved confidence in reduced post-Brexit uncertainty and declining energy costs.
Chancellor Jeremy Hunt said the IMF report shows a “big upgrade” for the country’s growth prospects and credits the Government’s “action to restore stability and tame inflation”.
“It praises our childcare reforms, the Windsor Framework and business investment incentives,” he said.
“If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy – but the job is not done yet.”
IMF economists made no change to the growth forecast for 2024, with the economy set to grow by 1 per cent next year.
“Growth is projected to rise gradually to 1 per cent in 2024, as disinflation softens the hit to real incomes, and to average about 2 per cent in 2025 and 2026, mainly on the back of a projected easing in monetary and financial conditions,” the IMF said.
But the report does endorse the UK plugging skills shortages with immigrants, amid debate in Westminster about government policy ahead of the publication of new data this week on net migration.
According to the IMF, the UK should look at “fine-tuning the immigration system to alleviate sectoral and skilled labour shortages and enhance labour market flexibility”.
Ministers have come under pressure from some quarters to set out plans to bring down net migration, with the Office for National Statistics set to publish figures this week that could show it reached at least 700,000 in the 12 months to December 2022.
The IMF also pointed positively to the UK and the EU finally reaching a deal on the Northern Ireland Protocol, while also noting the “more measured approach for retained EU laws” as something that will benefit business.
The recent scaling back of post-Brexit plans to scrap EU laws prompted backbench anger among Conservatives, but there have been signs in recent months of better relations between London and Brussels.
In the report the IMF expresses hope said that a UK return to the EU’s 100 billion euro Horizon programme, something sought by ministers, can boost small and medium-sized firms’ access to finance and research and design support.
The Article IV report, an assessment of the UK economy, also signals that the country could experience high interest rates for some time to come as the Bank of England battles inflation.
The Bank increased the base interest rate to 4.5 per cent earlier this month – the 12th rise in a row since rates started going up in December 2021.
In the IMF’s view “monetary policy will need to remain tight to keep inflation expectations well-anchored and bring inflation back to target.
“Inflation is projected to return to the 2 per cent target only by mid-2025, six months later than in staff’s April forecast, and risks to this trajectory are tilted to the upside.”
It added that “further monetary tightening will likely be needed, and rates may have to remain high for longer to bring down inflation more assuredly”.