UK economy to suffer more than sanctions-hit Russia in 2023, warns IMF
The UK is on course to be the only major economy to shrink this year owing to Jeremy Hunt's tax raid and higher borrowing costs, according to the International Monetary Fund.
The IMF downgraded its 2023 UK growth forecast by more than any other G7 nation, blaming the prospect of a deeper recession on “tighter fiscal and monetary policies”.
It leaves the UK economy languishing behind Germany and even sanctions-hit Russia, with both countries expected to eke out modest growth this year.
It comes as Rishi Sunak is under pressure from Tory MPs to deliver a plan for growth, and following criticism from business leaders including Marks & Spencer chairman Archie Norman and Sir James Dyson of the Government's economic approach.
The Prime Minister and the Chancellor are however resisting calls to cut taxes in the upcoming budget, with Mr Hunt insisting on Friday that inflation needed to come down first.
On Wednesday, Britain faces the biggest day of industrial action in over a decade with strikes by an estimated 500,000 workers across seven unions set to bring the economy to a halt.
Schools will close as teachers walkout, with the railways, civil service and universities also affected.
The Fund singled out the UK as the only big economy in the advanced or developing world set to suffer a contraction, with a predicted decline of 0.6pc in 2023.
This is down from its previous projection of 0.3pc growth just three months ago and means the UK will go from being the fastest growing G7 economy in 2022 to the only economy expected to shrink this year.
The IMF said the downgrade reflected higher taxes and interest rates, a government spending squeeze and “financial conditions and still-high energy retail prices” that will “weigh on household budgets”.
“Consumer confidence and business sentiment have worsened,” the IMF said in an update of its World Economic Outlook.
“With inflation at about 10pc or above in several euro area countries and the United Kingdom, household budgets remain stretched. The accelerated pace of 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.”
Britain's weak economic performance is expected to continue into 2024, the IMF said, with the economy only expected to grow by 0.9pc as nervous households keep adding to their savings rather than spending money built up during the pandemic.
Annual growth of 0.9pc in 2024 would also represent the joint lowest growth in the G7 club of rich economies, alongside Italy and Japan, which have suffered decades of stagnation.
Business leaders have sharpened their attacks on the Government's lack of a credible growth plan in recent weeks, with the Institute of Directors branding Mr Hunt's strategy “empty”, and constant policy changes described as a “recipe for disaster” by the British Chambers of Commerce.
Dyson founder Sir James accused the Government of a “stupid” economic approach, while Mr Norman said that plans to ease post-Brexit trade were “baffling” and “overbearing”.
Some of the world's biggest energy firms have also warned that a windfall tax on profits introduced by Mr Sunak when Chancellor and increased by Mr Hunt will lead to less investment in the UK.
The Chancellor has privately admitted that he believes an assumption by the Office for Budget Responsibility (OBR) that households will drive down their savings in order to fund their spending habits is too optimistic.
A leaked OBR memo suggests Britain's shrinking workforce will leave the economy with less room to grow before inflationary pressures start to build, leaving the economy and public finances in a worse position ahead of the spring Budget.
Last week, Mr Hunt said any “significant” tax cuts were “unlikely” in his March 15 statement.
“Short-term challenges should not obscure our long-term prospects – the UK outperformed many forecasts last year,” Mr Hunt said in response to the IMF's latest outlook, adding that its predictions “confirm we are not immune to the pressures hitting nearly all advanced economies”.
The Fund's major downgrade also comes just months after it directed a stinging rebuke at former Prime Minister Liz Truss's economic policies. Mr Hunt reversed the bulk of her unfunded tax pledges following a jump in UK borrowing costs.
The downgrades reflect the Chancellor's decision to hit energy giants with higher windfall taxes, and also as a decision not to go ahead with a cut in the basic rate in income tax. Workers and businesses have been hit by a freeze in personal and business tax thresholds until 2028, and will be forced to shoulder more of the burden of rising energy costs from April, when average household bills will rise to £3,000, from £2,500.
The decision to raise corporation tax to 25pc this April from 19pc was already taken into account by the IMF in October.
Households and businesses will be hit by £20bn in extra taxes in 2024-25, according to the OBR.
The gloomy outlook for the UK came as the IMF upgraded its global growth forecast for 2023 to 2.9pc, from a previous projection of 2.7pc. However, it said world output was still expected to slow from 3.4pc in 2022.
“For advanced economies, the slowdown will be more pronounced, with a decline from 2.7pc last year to 1.2pc and 1.4 percent this year and next,” the IMF said. “Nine out of ten advanced economies will likely decelerate.”
Upgrades to its 2023 growth forecasts for the US, the eurozone and Japan largely reflected stronger-than-expected momentum in 2022, it added.
Separate data also suggested Germany has already tipped into recession in an embarrassing development for Chancellor Olaf Scholz who only two weeks ago insisted he was “absolutely convinced” there would be no decline.
Growth in Europe’s manufacturing engine fell by 0.2pc in the final three months of the year compared with the previous quarter, despite forecasts that the economy would flatline.
Pierre-Olivier Gourinchas, the IMF's chief economist, said global growth would “remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity”.
He added: “Despite these headwinds, the outlook is less gloomy than in our October forecast, and could represent a turning point, with growth bottoming out and inflation declining.”
The Bank of England is expected to raise interest rates for the tenth consecutive meeting to 4pc on Thursday, up from the current 3.5pc level.
Responding to the growth forecasts, Mr Hunt said: “The Governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted, however these figures confirm we are not immune to the pressures hitting nearly all advanced economies.
“If we stick to our plan to halve inflation, the UK is still predicted to grow faster than Germany and Japan over the coming years [when taking into account the UK's performance in 2022].”