The International Monetary Fund (IMF) has issued a cautionary forecast, indicating that the UK may experience an additional five years of elevated interest rates as a measure to combat
surging inflation. This warning comes as the IMF anticipates that the UK will have the highest inflation rate and the slowest economic growth among G7 economies in the upcoming year, including countries like the United States, France, Germany, Canada, Italy, and Japan.
Notably, the UK Treasury has contested the IMF's report, highlighting recent adjustments to UK growth that were not considered in the IMF's projections. Economic forecasts are inherently subject to variability due to various factors affecting growth, encompassing geopolitical developments and even climatic conditions. Nevertheless, such forecasts often offer valuable insights, particularly when they align with other economic predictions.
The IMF, an international organization comprising 190 member countries, has asserted that its growth forecasts for the following year in most advanced economies have generally been within a margin of approximately 1.5 percentage points of actual outcomes.
According to the IMF's latest semi-annual forecast, the UK is expected to outpace Germany in economic growth in 2023, thereby avoiding the last position in the G7 for growth. However, the IMF has downgraded the UK's growth prospects for the next year, forecasting a modest 0.6% growth rate, positioning the UK as the slowest-growing developed nation in 2024—a year widely speculated to coincide with a general election.
The IMF underscores that the UK's immediate economic prospects are being influenced by the necessity to maintain high interest rates as a means to rein in inflation, which, although decreasing, remains persistently above the targeted level. Raising interest rates is intended to make borrowing more expensive, prompting households to reduce spending and consumption, and potentially curbing price increases by businesses. However, this strategy involves a delicate balancing act, as overly aggressive rate hikes can adversely impact businesses and overall economic growth.
The IMF predicts that the UK's inflation rates will surpass those of all other G7 nations in both the current year and the following year. It foresees that the Bank of England's interest rates will reach their peak at 6% and remain around 5% until 2028, compared to the current rate of 5.25%.
"The decline in [UK] growth reflects tighter monetary policies to curb still-high inflation and lingering impacts of the terms-of-trade shock from high energy prices," notes the IMF report.
In response to the IMF's findings, Chancellor Jeremy Hunt remarked, "The IMF has upgraded growth for this year and downgraded it for next - but longer term they say our growth will be higher than France, Germany, or Italy. To get there, we need to deal with inflation and do more to unlock growth."
Global Economic Prospects: The recent conflict initiated by Hamas, the Palestinian militant group, against Israel is expected to cast a shadow over the annual gathering of the IMF and the World Bank, occurring in Marrakech, Morocco.
The IMF has already signaled concerns about a potential global economic slowdown, following what appeared to be a resilient start to the year. Although sectors such as tourism had rebounded following the pandemic, benefiting economies with significant travel and tourism industries like Italy, Mexico, and Spain, a slowdown in manufacturing sectors sensitive to interest rates was impeding overall growth. Additionally, there were indications that China's economic momentum was waning following its "reopening surge" at the start of 2023.
Global inflation, according to the IMF, had decreased by more than half from its peak of 11.6% in the second quarter of 2022 to 5.3% a year later.
The IMF's projections indicate a decline in global growth from 3.5% in 2022 to 3% in 2023 and further to 2.9% in 2024. Furthermore, the long-term consequences of three years of crises and rising prices had led to an increase in the global population living in absolute poverty by up to 95 million individuals, as noted in the report. Photo by AgnosticPreachersKid, Wikimedia commons.