UK to be worst-performing economy in G7 this year, IMF warns

Britain is on target for the worst financial efficiency of any nation within the G7, the Worldwide Financial Fund (IMF) has predicted, because it warned of extra turmoil in a “fragile” international monetary system.

The UK’s output is anticipated to contract by 0.3 per cent this yr earlier than rebounding to develop by 1 per cent subsequent yr, IMF economists mentioned.

The prediction places Britain firmly on the backside of the G7 group of economically superior nations. It’s the solely nation besides Germany that’s forecast to see a decline, whereas many non-G7 international locations, together with rising and growing nations, are “already powering forward”.

The fallout from Brexit, exacerbated by the financial missteps of former prime minister Liz Truss, has been blamed for Britain’s particularly poor efficiency. Paul Johnson, from the Institute of Fiscal Research (IMF), mentioned Brexit was “clearly a giant difficulty”.

The IMF additionally trimmed its worldwide development outlook for this yr, warning that components corresponding to stubbornly excessive inflation and disruption inside the monetary sector may slash output to near-recession ranges.

“With the latest enhance in monetary market volatility, the fog around the globe financial outlook has thickened,” it mentioned. “Uncertainty is excessive and the stability of dangers has shifted firmly to the draw back as long as the monetary sector stays unsettled.”

It singled out the UK and elements of Europe as being more likely to face an financial battle over the approaching years.

“Notably, rising market and growing economies are already powering forward in lots of circumstances, with development charges leaping from 2.8 per cent in 2022 to 4.5 per cent this yr,” the IMF mentioned.

In 2024, Britain will lastly see its output rise to 1 per cent, which places the nation stage with Japan however barely forward of Italy. Inflation is anticipated to fall from 9.1 per cent final yr to six.8 per cent this yr, and additional to three per cent in 2024, in keeping with the evaluation.

“Under the floor, nonetheless, turbulence is constructing, and the state of affairs is kind of fragile, because the latest bout of banking instability reminded us,” it continued. “Inflation is far stickier than anticipated even just a few months in the past. Whereas international inflation has declined, that displays principally the sharp reversal in power and meals costs.

“However core inflation, excluding the unstable power and meals parts, has not but peaked in lots of international locations.”

The IMF is now forecasting a worldwide actual GDP development price of two.8 per cent in 2023 and three.0 per cent in 2024, marking a pointy slowdown from 3.4 per cent development in 2022.

Potential dangers forward embody persistently excessive inflation requiring extra aggressive central-bank price hikes; escalation of Russia’s warfare in Ukraine; and setbacks in China’s restoration from Covid.

The IMF forecasts don’t embody the impression of a latest oil output reduce by OPEC+ international locations, which has brought on oil costs to spike.

Rachel Reeves, Labour’s shadow chancellor, mentioned the IMF’s verdict “exhibits simply how far we proceed to lag behind on the worldwide stage”.

“This issues not simply because 13 years of low development underneath the Tories [have weakened] our economic system, however as a result of … households are worse off, dealing with a Tory mortgage penalty and seeing dwelling requirements falling at their quickest price since information started,” she added.

“The federal government ought to be easing the price of dwelling disaster now, by backing Labour’s plan to freeze council tax this yr, funded by a correct windfall tax on oil and fuel giants.”

Liberal Democrat Treasury spokesperson Sarah Olney argued that the forecasts have been “one other damning indictment of this Conservative authorities’s file on the economic system”.

“Throughout the nation, households and pensioners are already fighting file payments, rampant inflation and the very best tax burden in 70 years. However the Conservatives both don’t get it or simply don’t care.

“What the nation wants is an finish to all this Conservative chaos and a correct plan to get our economic system rising strongly once more,” she mentioned.

However chancellor Jeremy Hunt mentioned the IMF’s evaluation confirmed that the UK was on target.

“Due to the steps we now have taken, the OBR says the UK will keep away from recession, and our IMF development forecasts have been upgraded by greater than another G7 nation,” he mentioned.

“The IMF now says we’re heading in the right direction for financial development. By sticking to the plan, we are going to greater than halve inflation this yr, easing the strain on everybody.” 

However Mr Johnson, director of the influential IMF assume tank, informed The Impartial that the UK had “fallen behind” its worldwide friends.

“We stay nonetheless the one main economic system that hasn’t reached its pre-pandemic output stage. After which the disappointing factor from the IMF forecasts is that they anticipate us to be doing poorly over the approaching yr as nicely,” Mr Johnson added.

He mentioned that the short-term shock of hovering power costs was partially in charge, given the UK’s “specific dependence” on power imports, however added: “Brexit is clearly a giant difficulty for us, and the uncertainty attributable to [the mini Budget] final autumn has been a problem for us.” Mr Johnson additionally mentioned {that a} lack of funding in long-term infrastructure initiatives that would probably have boosted development was “completely” holding Britain again.

The boss of pro-EU marketing campaign group Finest for Britain, Naomi Smith, mentioned that Britain’s poor efficiency is a results of Brexit. Ms Smith added: “The federal government’s unworkable Brexit deal has elevated prices, shortages and paperwork for British companies. It’s the simple distinction between the UK and different G7 economies.”

Economist Dominic Caddick, of left-wing assume tank the New Economics Basis, additionally blamed Brexit for pushing up import costs. And he highlighted the UK’s reliance on imported fossil fuels, which has left households on the hook after costs soared following Russia’s invasion of Ukraine.

He added: “There’s nonetheless time to spend money on our economic system and enhance incomes to fight the sky-high value of dwelling. If we wish to keep away from a recession, we ought to be taking classes in international management from our American friends, and massively spend money on inexperienced infrastructure whereas creating new and well-paid jobs.”

However former Treasury minister John Redwood blamed the UK’s poor standing on a mix of rising rates of interest and better taxes on enterprise. “I’ve been saying this for a very long time. I didn’t want the IMF to inform me that these insurance policies will gradual the economic system, however I’m happy they perceive what’s going on,” he informed The Impartial.

Sir John, who campaigned in opposition to the federal government’s choice to hike company tax this month from 19 per cent to 25 per cent, mentioned the rise “goes to break development and funding right here”.

“Now we have already seen firms saying they don’t seem to be going to speculate right here now, as a result of the speed is just too excessive and the overall financial stance isn’t pro-growth sufficient. You’ll anticipate fewer individuals to speculate if the intention of coverage is to chop development considerably, which is what the coverage is doing in the mean time,” he added.