UK economy set for sharp contraction as the cost-of-living crisis hits households hard

The UK economy will slam into reverse this year as the cost-of-living crisis hits households hard and will see the worst performance of all the advanced nations, the International Monetary Fund (IMF) has warned.

In its latest World Economic Outlook update, the IMF downgraded its UK gross domestic product (GDP) forecast once again, predicting a contraction of 0.6% against the 0.3% growth pencilled in last October as Britain looks set to suffer more than most from soaring inflation and higher interest rates.

But it nudged up its outlook for UK growth in 2024 to 0.9%, up from the 0.6% expansion previously forecast.

The grim outlook for the year ahead puts the UK far behind its counterparts in the G7 group of advanced nations and the only country – across advanced and emerging economies – expected by the IMF to suffer a year of declining GDP.

Among the other G7 nations, the IMF’s 2023 GDP predictions show growth of 1.4% in the United States, 0.1% in Germany, 0.7% in France, 0.6% in Italy, 1.8% in Japan and 1.5% in Canada.

It comes against a backdrop of public sector strikes over pay and predictions that the UK is heading for a recession, with inflation still standing at more than 10%.

The IMF said Britain’s predicted GDP fall reflects “tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets”.

Declinism

It follows efforts by Chancellor Jeremy Hunt last week to talk up the UK economy and its growth prospects in his first major speech in the post, declaring that “declinism about Britain was wrong in the past and it is wrong today”.

The IMF offered a chink of light in the otherwise gloomy economic update, predicting that the global slowdown will be shallower than first feared.

It upgraded its global growth forecast, to 2.9% in 2023 from the 2.7% predicted in October as it said the reopening of China after strict Covid restrictions has “paved the way for a faster-than-expected recovery”.

The IMF also said it believes global inflation has passed its peak and will fall from 8.8% last year to 6.6% in 2023 and 4.3% in 2024 as interest rate hikes by central banks begin to cool demand and slow price rises.

But it warned that, in the UK and Europe, surging prices and the impact of action taken to rein in inflation, will continue to weigh on the economy.

It said: “Consumer confidence and business sentiment have worsened.

“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.”

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.

“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.”