Britain is on course for the worst economic performance of any country in the G7, the International Monetary Fund (IMF) has predicted, as it warned of more turmoil in a “fragile” global financial system.
The UK’s output is expected to contract by 0.3 per cent this year before rebounding to grow by 1 per cent next year, IMF economists said.
The prediction puts Britain firmly at the bottom of the G7 group of economically advanced nations. It is the only country except Germany that is forecast to see a decline, while many non-G7 countries, including emerging and developing nations, are “already powering ahead”.
The fallout from Brexit, exacerbated by the economic missteps of former prime minister Liz Truss, has been blamed for Britain’s especially poor performance. Paul Johnson, from the Institute of Fiscal Studies (IFS), said Brexit was “clearly a big issue”.
The IMF also trimmed its worldwide growth outlook for this year, warning that factors such as stubbornly high inflation and disruption within the financial sector could slash output to near-recession levels.
“With the recent increase in financial market volatility, the fog around the world economic outlook has thickened,” it said. “Uncertainty is high and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled.”
It singled out the UK and parts of Europe as being likely to face an economic struggle over the coming years.
“Notably, emerging market and developing economies are already powering ahead in many cases, with growth rates jumping from 2.8 per cent in 2022 to 4.5 per cent this year,” the IMF said.
In 2024, Britain will finally see its output rise to 1 per cent, which puts the country level with Japan but slightly ahead of Italy. Inflation is expected to fall from 9.1 per cent last year to 6.8 per cent this year, and further to 3 per cent in 2024, according to the analysis.
“Below the surface, however, turbulence is building, and the situation is quite fragile, as the recent bout of banking instability reminded us,” it continued. “Inflation is much stickier than anticipated even a few months ago. While global inflation has declined, that reflects mostly the sharp reversal in energy and food prices.
“But core inflation, excluding the volatile energy and food components, has not yet peaked in many countries.”
The IMF is now forecasting a global real GDP growth rate of 2.8 per cent in 2023 and 3.0 per cent in 2024, marking a sharp slowdown from 3.4 per cent growth in 2022.
Potential risks ahead include persistently high inflation requiring more aggressive central-bank rate hikes; escalation of Russia’s war in Ukraine; and setbacks in China’s recovery from Covid.
The IMF forecasts do not include the impact of a recent oil output cut by OPEC+ countries, which has caused oil prices to spike.
Rachel Reeves, Labour’s shadow chancellor, said the IMF’s verdict “shows just how far we continue to lag behind on the global stage”.
“This matters not just because 13 years of low growth under the Tories [have weakened] our economy, but because ... families are worse off, facing a Tory mortgage penalty and seeing living standards falling at their fastest rate since records began,” she added.
“The government should be easing the cost of living crisis now, by backing Labour’s plan to freeze council tax this year, funded by a proper windfall tax on oil and gas giants.”
Liberal Democrat Treasury spokesperson Sarah Olney argued that the forecasts were “another damning indictment of this Conservative government’s record on the economy”.
“Across the country, families and pensioners are already struggling with record bills, rampant inflation and the highest tax burden in 70 years. But the Conservatives either don’t get it or just don’t care.
“What the country needs is an end to all this Conservative chaos and a proper plan to get our economy growing strongly again,” she said.
But chancellor Jeremy Hunt said the IMF’s analysis showed that the UK was heading in the right direction.
“Thanks to the steps we have taken, the OBR says the UK will avoid recession, and our IMF growth forecasts have been upgraded by more than any other G7 country,” he said.
“The IMF now says we are on the right track for economic growth. By sticking to the plan, we will more than halve inflation this year, easing the pressure on everyone.”
But Mr Johnson, director of the influential IFS think tank, told The Independent that the UK had “fallen behind” its international peers.
“We remain still the only major economy that hasn’t reached its pre-pandemic output level. And then the disappointing thing from the IMF forecasts is that they expect us to be doing poorly over the coming year as well,” Mr Johnson added.
He said that the short-term shock of soaring energy prices was partially to blame, given the UK’s “particular dependence” on energy imports, but added: “Brexit is clearly a big issue for us, and the uncertainty caused by [the mini Budget] last autumn has been an issue for us.” Mr Johnson also said that a lack of investment in long-term infrastructure projects that could potentially have boosted growth was “absolutely” holding Britain back.
The boss of pro-EU campaign group Best for Britain, Naomi Smith, said that Britain’s poor performance is a result of Brexit. Ms Smith added: “The government’s unworkable Brexit deal has increased costs, shortages and bureaucracy for British businesses. It is the undeniable difference between the UK and other G7 economies.”
Economist Dominic Caddick, of left-wing think tank the New Economics Foundation, also blamed Brexit for pushing up import prices. And he highlighted the UK’s reliance on imported fossil fuels, which has left households on the hook after prices soared following Russia’s invasion of Ukraine.
He added: “There’s still time to invest in our economy and increase incomes to combat the sky-high cost of living. If we want to avoid a recession, we should be taking lessons in global leadership from our American peers, and massively invest in green infrastructure while creating new and well-paid jobs.”
But former Treasury minister John Redwood blamed the UK’s poor standing on a combination of rising interest rates and higher taxes on business. “I have been saying this for a long time. I did not need the IMF to tell me that these policies will slow the economy, but I am pleased they understand what is going on,” he told The Independent.
Sir John, who campaigned against the government’s decision to hike corporation tax this month from 19 per cent to 25 per cent, said the increase “is going to damage growth and investment here”.
“We have already seen companies saying they are not going to invest here now, because the rate is too high and the general economic stance is not pro-growth enough. You would expect fewer people to invest if the intention of policy is to cut growth substantially, which is what the policy is doing at the moment,” he added.
