UK to avoid recession but high interest rates needed for some time yet says IMF
The UK is forecast to avoid a recession this year, but high interest rates will likely be needed for some time yet to tackle inflation, according to the International Monetary Fund (IMF).
The IMF, in a new assessment of the UK economy, upgraded growth to 0.4% this year after initially forecasting last month that UK output was expected to contract by 0.3%.
But the more positive projection came alongside warnings of a “subdued” outlook for growth and the threat posed by ongoing global uncertainty.
Chancellor Jeremy Hunt pointed to the IMF report as a vindication of the the Government’s efforts to “restore stability and tame inflation”.
“It praises our childcare reforms, the Windsor Framework and business investment incentives,” he said.
“If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy – but the job is not done yet.”
IMF managing director Kristalina Georgieva praised Hunt and Prime Minister Rishi Sunak, but had bad news for the backbench Conservative MPs pushing for tax cuts from the Treasury.
Georgieva told reporters that there was currently “no intention to go for tax cuts” in the UK.
“The Government is rightly prioritising the alignment of fiscal policy with monetary policy.
“We think that that alignment will have to stay for quite some time because the Government is aiming to get inflation down by half by the end of the year.
“That is not a trivial goal, but in our view, it is achievable.”
She stressed multiple times the importance of tackling inflation, as she avoided giving an endorsement of tax cuts in the near future.
“Of course it is attractive to look into ways in which the tax burden is lighter, to inject more investment opportunity.
“But only when it is affordable and at this point of time, neither it is affordable nor it is desirable because if you want to constrain demand and increase supply, you have to think what are the right policy measures for it.”
The latest forecast comes amid ongoing concerns about the UK’s sluggish growth and unflattering comparisons to other large economies.
IMF economists made no change to the growth forecast for 2024, with the economy set to grow by 1% next year.
“Growth is projected to rise gradually to 1% in 2024, as disinflation softens the hit to real incomes, and to average about 2% in 2025 and 2026, mainly on the back of a projected easing in monetary and financial conditions,” the IMF said.
Georgieva said that the latest assessment reflects “favourably” on the UK in comparison to other G7 countries: “We are likely to see UK performing better than Germany, for example.”
The Article IV report, an assessment of the UK economy, also signals that the country could experience high interest rates for some time to come as the Bank of England battles inflation.
The Bank increased the base interest rate to 4.5% earlier this month – the 12th rise in a row since rates started going up in December 2021.
In the IMF’s view “monetary policy will need to remain tight to keep inflation expectations well-anchored and bring inflation back to target”.
Georgieva stressed the danger of diverting from a tight monetary policy, telling the press conference: “The discussion around interest rates has somewhat shifted from ‘how high?’ to ‘for how long?’
“The critical action is this alignment of monetary and fiscal policy that the UK has achieved and the understanding there should be no premature exit from tighter financial conditions because of the risk that would bring to wage-price correlation in the future,” she said.
Elsewhere, the IMF report does endorse the UK plugging skills shortages with immigrants, amid debate in Westminster about Government policy ahead of the publication of new data this week on net migration.
According to the IMF, the UK should look at “fine-tuning the immigration system to alleviate sectoral and skilled labour shortages and enhance labour market flexibility”.
Ministers have come under pressure from some quarters to set out plans to bring down net migration, with the Office for National Statistics set to publish figures this week that could show it reached at least 700,000 in the 12 months to December 2022.
More stable relations with the EU were also praised by the IMF, with the body pointing positively to the UK and the EU finally reaching a deal on the Northern Ireland Protocol, while also noting the “more measured approach for retained EU laws” as something that will benefit business.
But the IMF boss also faced questions about whether her economists were consistently getting forecasts wrong for the UK, after this latest adjustment.
Georgieva, who offered a robust defence of the IMF’s forecasting ability, said that the last projection had come amid the failure of Credit Suisse and the broader panic sparked by the collapse of Silicon Valley Bank.
While also pointing to the “more predictable relations” with the EU and the fall in energy prices as the reasons as among the reasons for the more positive outlook, she said her economists “deserve credit” for being “agile” in their response to all the uncertainty.
Recent years, she said, have been the “foggiest we have seen in many decades”.
Downing Street said the Government’s approach was “starting to bear fruit” but “there is much work still to do”.
The Prime Minister’s official spokesman said: “We are not on a glide path to growth, nor are we on a glide path to reducing inflation. It requires discipline on government spending and in many other areas.
“And the Government will stick to that plan because we believe it is right in the long-term.”