UK to be worst-performing financial system in G7 this yr, IMF warns

Britain is on track for the worst financial efficiency of any nation within the G7, the Worldwide Financial Fund (IMF) has predicted, because it warned of extra turmoil in a “fragile” international monetary system.

The UK’s output is predicted to contract by 0.3 per cent this yr earlier than rebounding to develop by 1 per cent subsequent yr, IMF economists mentioned.

The prediction places Britain firmly on the backside of the G7 group of economically superior nations. It’s the solely nation besides Germany that’s forecast to see a decline, whereas many non-G7 nations, together with rising and creating nations, are “already powering forward”.

The fallout from Brexit, exacerbated by the financial missteps of former prime minister Liz Truss, has been blamed for Britain’s particularly poor efficiency. Paul Johnson, from the Institute of Fiscal Research (IMF), mentioned Brexit was “clearly an enormous problem”.

The IMF additionally trimmed its worldwide progress outlook for this yr, warning that elements reminiscent of stubbornly excessive inflation and disruption throughout the monetary sector might slash output to near-recession ranges.

“With the current improve in monetary market volatility, the fog all over the world financial outlook has thickened,” it mentioned. “Uncertainty is excessive and the stability of dangers has shifted firmly to the draw back as long as the monetary sector stays unsettled.”

It singled out the UK and components of Europe as being more likely to face an financial wrestle over the approaching years.

“Notably, rising market and creating economies are already powering forward in lots of instances, with progress charges leaping from 2.8 per cent in 2022 to 4.5 per cent this yr,” the IMF mentioned.

In 2024, Britain will lastly see its output rise to 1 per cent, which places the nation degree with Japan however barely forward of Italy. Inflation is predicted to fall from 9.1 per cent final yr to six.8 per cent this yr, and additional to three per cent in 2024, in line with the evaluation.

“Beneath the floor, nevertheless, turbulence is constructing, and the scenario is sort of fragile, because the current bout of banking instability reminded us,” it continued. “Inflation is far stickier than anticipated even a number of months in the past. Whereas international inflation has declined, that displays largely the sharp reversal in power and meals costs.

“However core inflation, excluding the risky power and meals elements, has not but peaked in lots of nations.”

The IMF is now forecasting a world actual GDP progress charge of two.8 per cent in 2023 and three.0 per cent in 2024, marking a pointy slowdown from 3.4 per cent progress in 2022.

Potential dangers forward embody persistently excessive inflation requiring extra aggressive central-bank charge hikes; escalation of Russia’s battle in Ukraine; and setbacks in China’s restoration from Covid.

The IMF forecasts don’t embody the influence of a current oil output reduce by OPEC+ nations, which has triggered oil costs to spike.

Rachel Reeves, Labour’s shadow chancellor, mentioned the IMF’s verdict “exhibits simply how far we proceed to lag behind on the worldwide stage”.

“This issues not simply because 13 years of low progress below the Tories [have weakened] our financial system, however as a result of … households are worse off, dealing with a Tory mortgage penalty and seeing dwelling requirements falling at their quickest charge since data started,” she added.

“The federal government needs to be easing the price of dwelling disaster now, by backing Labour’s plan to freeze council tax this yr, funded by a correct windfall tax on oil and gasoline giants.”

Liberal Democrat Treasury spokesperson Sarah Olney argued that the forecasts had been “one other damning indictment of this Conservative authorities’s file on the financial system”.

“Throughout the nation, households and pensioners are already fighting file payments, rampant inflation and the best tax burden in 70 years. However the Conservatives both don’t get it or simply don’t care.

“What the nation wants is an finish to all this Conservative chaos and a correct plan to get our financial system rising strongly once more,” she mentioned.

However chancellor Jeremy Hunt mentioned the IMF’s evaluation confirmed that the UK was on the right track.

“Due to the steps we have now taken, the OBR says the UK will keep away from recession, and our IMF progress forecasts have been upgraded by greater than another G7 nation,” he mentioned.

“The IMF now says we’re heading in the right direction for financial progress. By sticking to the plan, we are going to greater than halve inflation this yr, easing the stress on everybody.” 

However Mr Johnson, director of the influential IMF suppose tank, informed The Unbiased that the UK had “fallen behind” its worldwide friends.

“We stay nonetheless the one main financial system that hasn’t reached its pre-pandemic output degree. After which the disappointing factor from the IMF forecasts is that they anticipate us to be doing poorly over the approaching yr as effectively,” Mr Johnson added.

He mentioned that the short-term shock of hovering power costs was partially responsible, given the UK’s “specific dependence” on power imports, however added: “Brexit is clearly an enormous problem for us, and the uncertainty attributable to [the mini Budget] final autumn has been a difficulty for us.” Mr Johnson additionally mentioned {that a} lack of funding in long-term infrastructure tasks that would probably have boosted progress was “completely” holding Britain again.

The boss of pro-EU marketing campaign group Finest for Britain, Naomi Smith, mentioned that Britain’s poor efficiency is a results of Brexit. Ms Smith added: “The federal government’s unworkable Brexit deal has elevated prices, shortages and forms for British companies. It’s the plain distinction between the UK and different G7 economies.”

Economist Dominic Caddick, of left-wing suppose tank the New Economics Basis, additionally blamed Brexit for pushing up import costs. And he highlighted the UK’s reliance on imported fossil fuels, which has left households on the hook after costs soared following Russia’s invasion of Ukraine.

He added: “There’s nonetheless time to spend money on our financial system and improve incomes to fight the sky-high price of dwelling. If we need to keep away from a recession, we needs to be taking classes in international management from our American friends, and massively spend money on inexperienced infrastructure whereas creating new and well-paid jobs.”

However former Treasury minister John Redwood blamed the UK’s poor standing on a mixture of rising rates of interest and better taxes on enterprise. “I’ve been saying this for a very long time. I didn’t want the IMF to inform me that these insurance policies will sluggish the financial system, however I’m happy they perceive what’s going on,” he informed The Unbiased.

Sir John, who campaigned in opposition to the federal government’s resolution to hike company tax this month from 19 per cent to 25 per cent, mentioned the rise “goes to wreck progress and funding right here”.

“We’ve already seen firms saying they aren’t going to take a position right here now, as a result of the speed is simply too excessive and the final financial stance just isn’t pro-growth sufficient. You’ll anticipate fewer folks to take a position if the intention of coverage is to chop progress considerably, which is what the coverage is doing in the intervening time,” he added.