The International Monetary Fund has stated that Britain will have the slowest growth among major industrialised nations in 2023 as soaring inflation and increasing interest rates squeeze household spending.
The organisation’s latest forecast the fund warned that the world economy was in a sensitive state and was poised to enter a recession. Although at the moment, it has not predicted contractions for the leading economies.
The institution’s World Economic Outlook update showed the UK was downgraded in both 2022 and 23, increasing its peak inflation forecast from 7.8% to 10.5% at the end of the year.
Although currently second in the G7 with economic expansion of 3.2%, (following Canada) in 2023, the UK drops to the bottom position with 0.5% growth.
This comes amid the controversial leadership conservative leadership race, where the economy has been a focal point of debate.
Former Chancellor of the Exchequer Rishi Sunak has criticised his opponent for her plans to stoke inflation which has reached a 40 year high of 9.4% with promises of tax cuts. In contrast, Foreign Secretary Liz Truss has condemned Sunak’s strategy of rising taxes, which she says will drive the UK into a recession.
The reality of inflation is causing severe challenges for many households, with the worst cost of living crisis in decades, with the IMF stating sub-inflation pay rises are “are eroding household purchasing power,” causing limited growth.
According to Bloomberg Economics, “Truss’ tax cuts would add 0.6% to 2023 GDP, which would lift the UK’s growth rate above France, Germany, Italy and the US on the IMF forecasts. The tax cuts would also add 0.4 percentage points to inflation and mean interest rates rise an extra half a percentage point. Markets expect UK rates to reach 3%.”
Aside from the United Kingdom, the IMF has downgraded next year’s forecasts for Germany, Italy, Canada and the US by more significant amounts than the UK.
The IMF warned that the war in Ukraine could cause energy and food costs to rise even more and labour markets with low competition would allow workers to demand higher payments and higher interest rates could move countries in contraction.
The UK’s susceptibility to heightened inflation is stoked by a “perfect storm” which combines the high energy prices of Europe and the job shortages of the US. The WEO update warned that a wage price spiral could add further fuel to the fire as “workers increasingly demand compensation for past increases in the cost of living.”
In response to how to address the challenges, the IMF said “The exact amount of policy tightening required to lower inflation without inducing a recession is difficult to ascertain.”