IMF Revises UK Economic Forecast, Predicts Growth in 2023 Despite Persistent Inflation Concerns.

In a surprising turn of events, the International Monetary Fund (IMF) has revised its economic forecast for the United Kingdom, stating that the country is not likely to experience a recession in 2023. Previously, the IMF had predicted the UK would face the worst economic situation among the G7 nations this year. However, the newly released Article IV report, a comprehensive assessment of the UK’s economy, now projects a growth rate of 0.4% for 2023.

This updated forecast may be perceived as low, but it is a significant improvement from the previously anticipated contraction of 0.7%. Moreover, the UK’s projected growth rate exceeds the near-zero growth rate the IMF has estimated for Germany, contradicting prior expectations that the UK would hold the weakest economic position among the leading industrialised economies.

Despite the revised outlook, the IMF report notes that the cost of living crisis will continue to exert strain on the UK economy. The institution also warns that the full impact of the numerous interest rate hikes implemented since August 2023 is expected to emerge in the latter half of the year, potentially curbing demand and influencing inflation.

Since late 2021, the UK’s interest rates have climbed twelve times, currently standing at 4.5%. The IMF suggests that further increases might be necessary for the country to reach its inflation target of 2% by mid-2025, which is six months later than previously forecasted. This delay is attributed to the persistence of inflation, which continues to exceed the 2% target, with measures such as the annualised 3-month core inflation rates remaining strong at approximately 5% as of March.

This news, while positive on one hand, may also raise concerns among economists regarding the sustained high inflation rates. The IMF has stressed the need for continued tight monetary policies to manage inflation expectations and bring inflation back to target levels. These measures may need to include further monetary tightening, with high interest rates potentially maintained for an extended period to ensure a more confident reduction in inflation.

In response to the IMF report, UK Chancellor Jeremy Hunt expressed optimism, highlighting the significant upgrade in the UK’s growth forecast and recognising the government’s efforts to restore stability and manage inflation. Hunt also acknowledged the positive assessment of the country’s childcare reforms, the Windsor Framework, and business investment incentives.

Despite the uncertainties surrounding the global economy, the IMF’s latest assessment has raised questions about its forecasting record. During a news conference discussing the report’s findings, IMF Managing Director Kristalina Georgieva praised the agility of IMF staff in adjusting projections and providing as clear a picture as possible in highly uncertain times.

While the revised outlook brings encouraging news for the UK, it also underscores the continued challenges the country faces, particularly regarding inflation and its impact on the economy. As the UK navigates these challenges, the words of the Chancellor resonate: “the job is not done yet”.