The International Monetary Fund (IMF), on Tuesday, put forth a substantial revision of its initial prediction concerning the economic performance of the United Kingdom for this year. The UK is no longer anticipated to be the weakest performer amongst developed economies, contrary to earlier expectations.
According to the recent forecast by the IMF, headquartered in Paris, the UK's economic growth is slated to see a 0.4% rise in 2023. This is a significant 0.7 percentage point improvement compared to the outlook published in April.
The revised forecast is an outcome of unexpected tenacity in the country's demand, spurred by an increase in wages, an upswing in consumer confidence, and declining energy costs, noted the IMF.
Instead of a previously projected 0.3% shrink in the UK's GDP, the IMF now estimates that the UK's economic growth will outperform Germany's, which is predicted to contract by 0.1%. However, the UK's economic performance is still anticipated to trail behind Russia, France, and Italy, which are all forecasted to expand by 0.7%.
Yet, the IMF pointed out significant potential risks that could affect the UK's economic forecast. The primary short- to mid-term risk pertains to a possible lingering effect in price and wage adjustments, leading to sustained inflation. The required measures to curb inflation, such as raising interest rates, might also pose growth challenges. The IMF anticipates the inflation rate to realign with the Bank of England's 2% target by mid-2025, six months later than its April forecast.
Upcoming data is likely to indicate a marked deceleration in the UK's inflation in April, significantly influenced by dropping energy costs. Nevertheless, the IMF warned against hasty celebrations. Should wage and price pressures persist, inflation may stabilize at a higher-than-expected rate.
In a concerted effort to control inflation, the Bank of England has raised borrowing costs 12 times consecutively. The key interest rate for commercial banks has been increased to 4.5%, a level unseen since 2008. The central bank cautioned about potential inflation risks due to labor scarcities and robust wage growth, indicating the possible need for additional rate hikes to control price surges.
Despite the UK's inflation rate slowing down to 10.1% in March from 10.4% in February, it remains significantly higher than in the US and the EU. Meanwhile, the average wages, although trailing inflation, have risen 6.6% in the three months to February 2023, compared to the same period a year earlier, as per official data. In light of these factors, both the IMF and the Bank of England have expressed a more optimistic outlook for the UK economy. The central bank now predicts a 0.25% growth for this year, a marked improvement from its previous forecast of a 0.5% contraction.
