The United Kingdom will not, after all, be the worst-performing rich economy this year, the International Monetary Fund (IMF) said Tuesday, announcing a major revision to its previous gloomy forecast.
The forecast reflected “higher-than-expected” resilience in demand helped by strong wage growth, improved confidence and falling energy prices, the IMF added.
While previously the IMF saw UK GDP contracting by 0.3% this year, it now predicts that Britain will grow ahead of Germany, which is expected to shrink by 0.1%, according to its April forecast. The United Kingdom will still lag Russia, France and Italy, all expected to grow by 0.7%.
The IMF cautioned, however, of “considerable” risks to the outlook for the UK economy.
“The major near- to medium-term risk is greater-than-anticipated persistence in price and wage setting, which would lead to higher inflation for longer,” it said, noting potential “headwinds to growth” from “policies needed to combat inflation,” such as interest rate hikes.
The IMF expects inflation to return to the Bank of England’s 2% target only by mid-2025 — six months later than in its April forecast. “Risks to this trajectory are tilted to the upside… rates may have to remain high for longer to bring down inflation more assuredly,” it added.
Data due on Wednesday is expected to show a sharp slowdown in UK inflation in April, driven in large part by falling energy prices.
The IMF cautioned, however, against “premature celebrations,” saying inflation could “plateau” at an elevated rate if wage and price pressures prove persistent.
The Bank of England hiked borrowing costs for the 12th consecutive time earlier this month, taking the main interest rate for commercial banks to 4.5%, the highest since 2008. It also warned of upside risks to inflation, stemming in part from labor shortages and strong wage growth, and said further rate hikes might be necessary to tame prices.
The annual rate of UK inflation eased to 10.1% in March, from 10.4% in February, but still remained far higher than in the United States and the European Union. Average wages are still lagging inflation but rose 6.6% in the three months to February 2023 compared with a year prior, according to official data.
The IMF’s improved outlook for the UK economy follows a similarly positive revision by the Bank of England earlier this month. The central bank now expects the economy to grow 0.25% this year, compared with a February forecast for a contraction of 0.5%.
The IMF projects UK GDP growth to accelerate to 1% in 2024, in line with its previous forecast.
Correction: An earlier version of this article gave an incorrect location for the IMF's headquarters.