Digital Zeitgeist – IMF Predicts That This Year The United Kingdom Will Have The Worst Performance Of Any Major Economy Including Russia
Mortgage applications in the UK are tumbling and the number of companies going bankrupt is surging.
According to the International Monetary Fund (IMF), the United Kingdom’s economy will be the only one of the G7 nations to contract in 2023. This is due to factors such as increasing energy prices, rising mortgage costs, as well as more taxation.
After the effects of Liz Truss’s brief tenure as prime minister led a significant growth downgrade from the International Monetary Fund, it is anticipated that the United Kingdom will be the only major industrialised country to see a contraction in its GDP this year.
After the removal of Nadhim Zahawi as chair of the Conservative party, political pressure is mounting on Rishi Sunak. On Tuesday, the International Monetary Fund (IMF), based in Washington, issued a warning that it expected the economy of the United Kingdom to contract by 0.6% this year. This is 0.9 percentage points worse than the IMF had pencilled in just three months ago, and it is even slower than Russia, which is under sanctions.
According to the International Monetary Fund (IMF), while the outlook for every other member of the G7 group of leading developed nations had improved or remained unchanged since October, the outlook for the United Kingdom has become more pessimistic as a result of rising interest rates and higher taxes.
IMF economic adviser Pierre-Olivier Gourinchas predicted that 2023 would be “quite challenging” for the United Kingdom as a result of the country’s fall from first to seventh place in the G7 league table. He continued by saying, “There is a sharp correction.”
Last week, the chancellor of the United Kingdom, Jeremy Hunt, issued a warning that a mood of pessimism was hindering the United Kingdom’s economic recovery. Since then, the chancellor has been under pressure to devise a viable strategy to stimulate growth. His speech, which was focused on “enterprise, education, employment, and everywhere,” was harshly criticised by business executives for its lack of policies.
The International Monetary Fund (IMF) provided an update to its semi-annual World Economic Outlook (WEO) in April and October. The WEO is a health check on the global economy that is published twice a year in April and October.
The World Economic Outlook (WEO) for October 2022 was finished before the tax-cutting mini budget that was presented by the then-chancellor, Kwasi Kwarteng, in late September, and it projected growth of 0.3% for 2023. The International Monetary Fund (IMF) stated in its most recent statement that the United Kingdom’s economy had done better than projected in 2022, with growth of 4.1% rather than the 3.6% that was forecast three months earlier.
However, it stated that the outlook for the year 2023 had become less favourable, with its updated forecast reflecting the higher taxes announced by Hunt after he replaced Kwarteng, the increase in interest rates from the Bank of England, tougher financial conditions for borrowers, and still-high energy prices. On Thursday, the Bank is widely anticipated to increase the interest rate from 3.5 percent to 4.0 percent.
“With inflation at about 10% 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,” the IMF said.
According to sources within the Treasury, the International Monetary Fund’s attention on the high level of inflation emphasised the need to address the cost of living problem in the United Kingdom. They went on to say that Britain had exceeded the projections given by the International Monetary Fund and the Organization for Economic Cooperation and Development in the year 2021.
In response to the projections made by the IMF, Hunt stated, “The governor of the Bank of England recently stated that any UK recession this year is likely to be shallower than previously predicted. Nevertheless, these figures confirm that we are not immune to the pressures that are hitting nearly all advanced economies.”
Hunt continued by saying, “Short-term challenges should not obscure our long-term prospects – the UK outperformed many forecasts last year, and 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.” This was in reference to the fact that Hunt’s plan for growth includes the development of a region in the United Kingdom that would be comparable to Silicon Valley in California.
According to Gourinchas, the United Kingdom’s significant dependency on natural gas, which remains expensive, the “scarring” effect the COVID-19 epidemic had on the size of the workforce and increasing mortgage expenses would all have an influence on the country’s economic development.
According to an official from the International Monetary Fund (IMF), “all of these factors will lead to a fairly sharp retrenchment in activity this year.” It raised its growth expectations upward for the United States of America, Germany, Italy, and Japan, but it did not change its projections for the development of France or Canada’s economies. According to the International Monetary Fund (IMF), the growth prospects for Russia have significantly improved, with stronger military expenditure and robust energy exports contributing to an expected expansion of 0.3% in 2023 – an improvement of 2.6 points.
The International Monetary Fund (IMF) projects that global economic expansion will come in at 2.9% this year, which is 0.2 percentage points more than what was projected back in October. However, the IMF’s prognosis for 2024 has been lowered to 3.1% from 3.2%.
Gourinchas predicted that even after a slight improvement in the global picture for 2023, growth would remain sluggish when measured against historical norms because of the toll that would be taken by the struggle against the most intense inflationary pressures in forty years as well as Russia’s war in Ukraine.
“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.
“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labour markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe.”
Even if core inflation – inflation that excludes changes in the price of energy and food – has not yet reached its high in the majority of situations, the economic adviser for the IMF stated that he was heartened by indicators that inflation rates were declining in many nations.
“Elsewhere, China’s sudden re-opening paves the way for a rapid rebound in activity. And global financial conditions have improved as inflation pressures started to abate. This, and a weakening of the US dollar from its November high, provided some modest relief to emerging and developing countries,” Gourinchas said.
“On the upside, a stronger boost from pent-up demand in numerous economies or a faster fall in inflation are plausible. On the downside, severe health outcomes in China could hold back the recovery, Russia’s war in Ukraine could escalate, and tighter global financing conditions could worsen debt distress.” Financial markets might also respond badly to higher than expected inflation news, the IMF added.
online sources: theguardian.com, imf.org