IMF Upgrades UK Economic Outlook, But Warns of Subdued Growth

The International Monetary Fund (IMF) has revised its forecasts for the British economy, no longer anticipating a recession in 2023. The IMF now expects a growth of 0.4% for the year, attributing the improved outlook to factors such as resilient demand, increased government spending, improved business confidence, lower energy costs, and the normalization of global supply chains. However, the IMF cautions that despite the recent improvements, the overall growth outlook remains subdued. The IMF also highlights the challenges of high inflation, partly caused by the Ukraine-Russia conflict and pandemic-related labour supply issues.

It predicts a decline in inflation to around 5% by the end of the year and a return to the 2% target by mid-2025. The IMF's forecast indicates a growth rate of 1% in 2024, followed by 2% in the subsequent two years, before settling at a long-term growth rate of approximately 1.5%. The IMF suggests that addressing long-term illness's impact on the labour force and reducing policy and regulatory uncertainty would enhance Britain's growth potential. It also emphasizes the importance of monitoring inflation and wage increases closely while ensuring appropriate monetary policy adjustments. The IMF's statements come amidst the Bank of England's series of interest rate hikes, which are expected to peak at 5% later this year.

Interest rates are now at 2.25% – the highest rate that the UK has had since the financial crisis – after the Monetary Policy Committee (MPC) increased rates by 0.5 percentage points.

The rates had previously been speculated to rise by even more, but the Bank of England announced on Thursday that a majority vote of 5-4 had been reached to settle on the figure of 2.25%.

The decision to hike interest rates is a bid to keep inflation under control. It is the best tool that the Bank of England has to steer inflation – currently at 9.9% – back to its 2% target.