Just last month, the organisation was predicting the UK would face the worst 2023 of any G7 nation. But, after “eating humble pie”, one strategist said, the IMF is now forecasting growth of 0.4 per cent this year. That compares with the 0.3 per cent contraction cited in its previous assessment of the world’s major economies.
Despite the fund’s volte-face, the body cautioned inflation “remains stubbornly high” and that higher interest rates would need to remain in place if the level was to be brought down. The IMF also noted the risks for the UK economy were “considerable”.
It said its new assessment reflected “higher-than-expected resilience” in both demand and supply, referencing improved confidence in reduced post-Brexit uncertainty and declining energy costs.
The substantial upgrade and change of tone in such a short timeframe could call into question the effectiveness of the IMF’s forecasting, though economists, including those within the Bank of England and the Treasury, have frequently been criticised for making wide-of-the-mark projections.
IMF managing director Kristalina Georgieva defended the organisation from suggestions that it was consistently getting UK forecasts wrong. She said the projections were “slightly less pessimistic” than similar forecasts by the Bank of England and others. “We have gone through a very turbulent time over the last years,” she said. “We have experienced shock, upon shock, upon shock. That has created exceptional uncertainty.”
She said IMF’s economists “deserve credit” for being “agile in how we look at changing conditions and being fast to adjust projections so we can give as clear a picture as we can at a time, you will agree, is the foggiest we have seen in many decades”.
The fund made no change to the growth forecast for 2024, with the UK economy projected to grow by 1 per cent next year.
Ben Laidler, global markets strategist at social investment network eToro, said: “The IMF has eaten humble pie, reversing its overly bearish recession forecasts for the UK economy. This follows the lead from the Bank of England, which recently raised its forecasts.”
Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, said the IMF may have been behind the curve, though the prospects for the UK had looked particularly bleak in the autumn after the chaos of the mini-Budget. She said: “Britain has defied gloomy predictions for a long recession, with the IMF now joining the chorus of revisions. The surprising resilience of companies and consumers have helped buck the forecasts made amid the stormy financial weather prompted by the Truss/Kwarteng mini-Budget.
“In the autumn, interest rates were forecast to shoot up to above 6 per cent and an energy crisis in Europe was still widely feared. But, as gas prices have retreated, the UK Government has repaired its financial credibility, and consumers have shown hardiness amid rising prices, so prospects for the UK are now brighter.”
ING developed market economist James Smith added: “We agree with the IMF that … the economy should continue to dodge a recession over the next few months, though we shouldn’t expect strong economic growth either. The UK also isn’t totally immune from the recent banking stresses in the US, which we think is likely to tip the American economy into recession later this year and will inevitably have some spill over to the global economic outlook.”
The IMF’s Article IV report, an assessment of the UK economy, signals the country could experience high interest rates for some time to come as the Bank of England battles inflation. The central 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. Most observers expect at least one further quarter-point hike before borrowing costs come down again. In the IMF’s view, monetary policy will need to remain tight to keep inflation expectations “well-anchored” and bring inflation back to target.
Chancellor Jeremy Hunt said the IMF assessment “provided a timely, independent assessment of the UK economy”, as he pointed to a global economic backdrop of “challenge and opportunity”. But he said the report showed the UK was “on the right track”.
The report came after it emerged that UK Government borrowing swelled to £25.6 billion last month amid the cost of energy support schemes, higher benefit payments and rising debt interest. The Office for National Statistics said it was the second-highest April borrowing on record, outstripped only by the pandemic-impacted month in 2020.
The latest figure was £7.7 billion bigger than economists had predicted and £3.1bn larger than predictions from the Government’s official forecaster, the Office for Budget Responsibility. Britain’s debt interest bill increased to £9.8bn in April, the highest for the month since records began in 1993, due to increased interest on inflation-linked government bonds.
Danni Hewson, head of financial analysis at investment group AJ Bell, said: “Balancing the books will look a lot less challenging if [Wednesday’s] inflation numbers have indeed fallen below double digits. But the age-old problem of productivity has nestled into the country’s skin like a burr and achieving real growth looks as hard as it’s ever been.”