IMF expects UK economy to avoid recession

The UK economy is expected to avoid a recession this year, the International Monetary Fund has said, after it sharply upgraded its growth forecast.

It now expects the UK to grow by 0.4% in 2023, whereas last month it forecast the economy would contract by 0.3%.

Growth would be helped by "resilient demand" and falling energy prices.

But the IMF said inflation "remains stubbornly high" and that higher interest rates will need to remain in place if it is to be brought down.

It also noted that the risks for the UK economy are "considerable", with the biggest danger "greater-than-anticipated persistence in price- and wage-setting", which would keep inflation higher for longer.

The IMF also added that the UK must address the record numbers of people not working, many of whom have long-term illnesses.

Chancellor Jeremy Hunt said the IMF statement "credits our action to restore stability and tame inflation" and added it "praises our childcare reforms, the Windsor Framework and business investment incentives".

"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."

Pat McFadden, Labour's shadow chief secretary to the Treasury, said the report revealed "the fragility of the UK economy, highlighting the slowdown in economic activity since last year and stubbornly high prices".

The IMF said its growth upgrade was helped by faster-than-usual pay growth, falling energy costs and the normalisation of global supply chains.

However, it noted that while outlook for growth had improved in recent months, it "remains subdued".

The IMF forecasts the economy will grow by 1% in 2024, rising to 2% in 2025 and 2026.

It also predicts that inflation will not return to the Bank of England's target of 2% target until mid-2025, which is later than it had forecast previously.

"Further monetary tightening will likely be needed," the agency said, and interest rates "may have to remain high for longer to bring down inflation more assuredly".

The IMF works to stabilise the global economy and one of its key roles is to act as an early economic warning system.

Last year, the fund openly criticised the short-lived plans by the UK government, then led by Liz Truss, for tax cuts. It said the measures, which were unveiled in September's mini budget but quickly scrapped, were likely to fuel the cost of living crisis.

One of the criticisms of the mini budget was that it was not accompanied by an analysis from the government's independent forecasting body, the Office for Budget Responsibility (OBR).

In its latest forecast, the IMF recommended that all major fiscal policy changes should be accompanied by OBR forecasts, unless the OBR assessed that they were not necessary.

Earlier on Tuesday, official figures showed UK government borrowing hit a higher-than-expected £25.6bn in April, the second-highest borrowing figure for the month since records began in 1993.

The borrowing figure - which represents the difference between spending and tax income - was £11.9bn more than for the same month last year, with inflation pushing up interest payments on debt partly to blame.

The ONS said interest payments on central government debt hit £9.8bn in April. That was £3.1bn more than a year earlier, and was the highest April figure since monthly records began in 1997.

The increase largely reflects the increase in interest payable on UK bonds, which are financial products that the government sells to international investors to raise the money it needs.

Many of these bonds are "index linked", meaning the government's repayments rise in line with the Retail Prices Index measure of inflation, which is currently at double-digit levels.

When the rate of inflation increases, the cost to the government of these interest payments also rises.

Inflation figures due on Wednesday are expected to show the rate falling below 10% for the first time since last July.

Capital Economics analyst Ruth Gregory said the figures showed the public finances had got the new fiscal year "off to a shaky start".

"But we doubt this will prevent the chancellor from embarking on a fiscal splurge ahead of the next election."