According to the IMF, the economy will shrink by 0.6% in 2023 rather than growing slightly as was previously forecast.
The IMF said however that the UK was “on the right path”.
Chancellor Jeremy Hunt stated that the UK exceeded many forecasts in last year’s financial year.
Shadow chancellor Rachel Reeves, however, said that the figures showed that the UK was “lagging behind our peers”.
The IMF, an organization that works to stabilize economic growth, stated it had reduced its forecast for the UK due to high energy prices, rising interest rates and higher taxes as well as persistent worker shortages.
All advanced and emerging economies expect the UK to be the only country that shrinks next year. Even Russia, which is currently under sanctions, is expected to grow this year.
When a country’s economy is weaker, it means that companies make less money and people are more likely to be unemployed.
Pierre-Olivier Gourinchas, chief economist at IMF, told BBC that the UK experienced “one of Europe’s strongest growth rates” last year.
He said that this year’s forecast was due to the country’s “high dependence on liquid natural gas,” which has driven up living costs.
Mr Gourinchas stated that the Treasury’s plans for the UK in the months following the Autumn Statement had shown the UK was “certainly trying carefully to navigate these different challenges, and we believe they are on track.”
The IMF predicts that the UK will grow by 0.9% in 2024. This is an increase from 0.6%.
Paul Johnson, Director of the Institute for Fiscal Studies, stated that IMF forecasts are not always accurate and that the fund is “actually being more optimistic” than it was just a few months ago.
He said that forecasts by the Bank of England for this week will likely be more optimistic than they were two or trois months ago.
“My best guess suggests that the economy will remain stagnant in this year’s economic growth.” He stated that while we won’t see much growth, we won’t have a deep recession.
“Now that’s not good, especially as we should be rebounding more strongly from Covid, and especially as we haven’t been growing very well over the past decade or more.
IMF attributes the IMF’s downbeat forecast to rapid rises in interest rates, tax rises and higher borrowing costs for business. Also, high domestic energy prices. According to the fund, the UK is facing a complex environment.
If this forecast is correct, it raises the question of why the UK has missed out on better economic conditions worldwide. This report shows that the UK is the only economy to shrink out of all 15 countries.
The Bank of England will release its latest forecast for the UK economy this week. It will also announce an expected increase in interest rates.
The chancellor has been under pressure by some members of his party to reduce taxes in order to stimulate the economy. He stated that lowering inflation was the “best tax cut” right now.
Inflation is the rate at which prices increase – has remained close to its highest level for 40 years.
Rishi Sunak, Prime Minister of India, has promised to reduce inflation to half by the end the year. However, many people expect this to happen regardless due to slowdowns in energy price increases and post-pandemic supply issues.
The official forecaster by the Office for Budget Responsibility (OBR),foresees inflation falling to 3.75% by year’s end. This is well below the current level.
Andrew Bailey, governor of the Bank of England has said that inflation will likely fall quickly this year, but warned that a UK recession could still be on the horizon.
The IMF predicts that the UK’s economy will shrink, but it projects economic growth of 1.4% in America, 0.1% in Germany, and 0.7% for France.
Hunt stated that the IMF figures “confirm” we are not immune from the pressures on nearly all advanced economies.
He said that “short-term problems should not obscure our long term prospects – The UK outperformed many predictions last year and if our plan to halve inflation is kept, the UK will still be predicted to grow faster than Germany or Japan over the next years.”
When it comes to forecasting the future, economic forecasters don’t always get it right. According to the IMF, its predictions for advanced economies such as the UK have not always been within 1.5 percentage points what actually happens.
According to the IMF, the global trend of central banks raising interest rates to combat inflation and the war in Ukraine continues to “weigh on” economic activity.
It said that China’s reopening of its economy after Covid restrictions “paved way for a faster than expected recovery” worldwide.