Britain is the only G7 country whose economy is expected to contract in 2023 | Economic Growth (Gross Domestic Product)

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Britain is expected to be the only major industrialized country to experience an economic downturn this year after the impact of Liz Truss’ short presidency led to a sharp cut in growth by the International Monetary Fund.

Adding to the growing political pressure on Rishi Sunak following the sacking of Conservative Party chairman Nadeem Zahawi, the Washington-based International Monetary Fund warned on Tuesday that it expects Britain’s economy to contract by 0.6% this year – 0.9 percentage point worse than it was initially. Three months earlier and slower than even sanctions-hit Russia.

The International Monetary Fund said that while prospects for every other member of the Group of Seven major industrial nations have improved or remained unchanged since October, rising interest rates and higher taxes have made the outlook for the United Kingdom more bleak.

Pierre-Olivier Gournchas, economic advisor to the International Monetary Fund, said 2023 will be a “huge challenge” for the UK as it has slipped from top to bottom of the G7 table. “There is a sharp correction,” he added.

Britain’s finance minister, Jeremy Hunt, warned last week that a sense of stagnation was hindering the UK’s economic recovery, and came under pressure to come up with a credible plan to boost growth. His speech, which focused on “enterprise, education, employment and everywhere,” was widely criticized by business leaders as devoid of politics.

The UK’s growth rate cut came in the IMF’s biannual update of the World Economic Outlook – a health check of the global economy published in April and October.

The October 2022 World Economic Outlook was completed ahead of the then-Chancellor’s tax-cut mini-budget, Kwasi Kwarting, in late September and with growth of 0.3% for 2023. In its update, the IMF said the UK had a stronger performance in 2022. than expected, as it grew by 4.1% instead of the 3.6% expected three months ago.

But it said the outlook for 2023 has deteriorated, with its updated outlook reflecting higher taxes Hunt announced after his replacement by Quarting, an interest rate increase from the Bank of England, tighter financial conditions for borrowers and still-high energy prices. The bank is expected to raise interest rates from 3.5% to 4% on Thursday.

With inflation running at 10% or more in many eurozone countries and the UK, household budgets remain strained. The International Monetary Fund said: “The accelerating pace of interest rate increases by the Bank of England and the European Central Bank is tightening financial conditions and cooling demand in the housing sector and beyond.”

Treasury sources said the IMF’s focus on the high level of inflation reinforced the need to tackle the UK’s cost of living crisis. In 2021, they added, Britain has outperformed the International Monetary Fund and the Organization for Economic Co-operation and Development.

Responding to the IMF’s forecasts, Hunt said: “The Governor of the Bank of England said recently that any recession in the UK this year is likely to be smaller than previously thought, but these figures underscore that we are not immune to pressures hitting almost all advanced economies. “

Hunt, whose growth plan includes developing the UK’s equivalent of California’s Silicon Valley, added: “Short-term challenges should not cloud our long-term prospects – the UK beat many of last year’s forecasts, and if we stick to our plan to halve inflation, The UK is still expected to grow faster than Germany and Japan over the coming years.”

Gourinchas said the UK’s heavy reliance on still-expensive natural gas, the “scarring” effect of the Covid-19 pandemic on the size of the workforce, and higher mortgage costs will have an impact on growth.

“All of these factors combined will lead to a fairly sharp decline in activity this year,” the IMF official said. Among other G7 countries, it revised its growth forecasts for the United States, Germany, Italy and Japan, while leaving them unchanged for France and Canada. The International Monetary Fund said Russia’s growth prospects have improved significantly, with increased military spending and booming energy exports leading to a 0.3% expansion forecast in 2023 – a 2.6-point upgrade.

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Overall, the International Monetary Fund expects global growth to be 2.9% this year, 0.2 points higher than expected in October, while the 2024 forecast was revised downward by 0.1 points to 3.1%.

Even after a modest improvement in the global picture for 2023, Gorynchas said, growth will remain weak by historical standards, as the fight against the strongest inflationary pressures in four decades and Russia’s war in Ukraine have taken their toll.

“Despite these headwinds, the outlook is less bleak than in our forecast for October, and could mark a turning point, with growth slowing and inflation subdued.

“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, strong household consumption and business investment, and a better-than-expected adjustment to Europe’s energy crisis.”

The IMF’s economic adviser said he was also encouraged by signs of declining inflation rates in many countries, although core inflation – which excludes energy and food prices – has not yet peaked in most cases.

Elsewhere, China’s sudden reopening is setting the stage for a rapid rebound in activity. Global financial conditions improved as inflation pressures eased. This, and the US dollar’s retreat from its November high, provided some modest relief for emerging and developing countries, Gorinchas said.

On the upside, a stronger boost from pent-up demand in many economies or a faster drop in inflation is possible. On the downside, severe health outcomes in China could impede recovery, Russia’s war in Ukraine could escalate, and tightening global financing conditions could exacerbate the debt crisis. The IMF added that financial markets may respond poorly to news of higher-than-expected inflation.

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