This year, the British economy may be the only G7 economy to decline, with even Russia performing better.
The IMF expects that the GDP will decline by 0.6% in 2023, which is far worse than the 0.3% growth it had previously projected.
No other member of the group of developed economies is anticipated to go into the red; even Russia, which has been hammered by sanctions, is forecast to report growth of 0.3%.
The Chancellor, Jeremy Hunt, and ministers asserted that previous pessimistic estimates had been inaccurate. Following the dismal Covid downturn, it is believed that the United Kingdom had the fastest growth among the G7 nations in 2012, at 4.1%.
However, Mr. Hunt must battle off growing Tory demands for tax cuts and a growth strategy to revive the economy.
Mr. Hunt and Mr. Sunak have cast cold water on the possibility of a reduction of the burden – the largest in a generation – in the March budget, stating that inflation must first be brought under control.
Previously, the IMF predicted that the UK’s GDP would expand by 0.3% in 2023; however, it now predicts a 0.6% decline.
In its most recent update to its World Economic Outlook, the IMF again lowered its UK gross domestic product (GDP) prediction, anticipating a 0.6% decline as opposed to the 0.3% increase projected in October, as Britain is expected to suffer more than most from rising inflation and interest rates. However, it increased its prediction for UK growth in 2024 from 0.6% to 0.9%.
Mr. Hunt has virtually ruled out tax cuts in his March budget, stating last week that he is “unlikely to have any room.”
In addition to increased energy costs, tighter fiscal policy – more taxes or less government expenditure – is mentioned as a major reason for the steep downgrading.
However, the most recent edition to the World Economic Outlook indicates that the government’s anti-inflation measures are justified.
The IMF’s chief economist, Pierre-Olivier Gourinchas, cited three key causes for the UK’s bleak outlook.
He stated, “First, there is exposure to natural gas… UK energy prices have risen dramatically.” A greater proportion of energy is derived from natural gas, and a greater proportion of this energy is transmitted to final users.
Employment levels in the United Kingdom have likewise not returned to pre-pandemic levels. This is a situation in which the labor market is extremely tight, but the economy has not reabsorbed as many individuals into employment as it once did. This indicates a decline in output and production.
‘Third, there is a very sharp monetary tightening since inflation has been so high; this is a byproduct of the high pass-through of energy costs.
“Inflation was 9.1% last year, and it’s expected to remain quite high at 8.2% in the coming year, so the Bank of England has begun to tighten monetary policy.”
The United Kingdom has a high proportion of adjustable-rate mortgages. Therefore, when the Bank of England begins to raise interest rates, it has a knock-on effect on the mortgage rates that mortgage holders pay, which also weighs on economic activity.
In response to the IMF study, Mr. Hunt stated, ‘The governor of the Bank of England recently stated that any recession in the United Kingdom this year is likely to be less severe than had been anticipated.
‘However, these numbers demonstrate that we are not immune to the difficulties affecting the majority of developed economies. Even if we adhere to our strategy to cut inflation in half, the United Kingdom is expected to expand faster than Germany and Japan in the future years.
Transport minister Ric Holden stated in a series of interviews this morning that the IMF has been “wrong” in the past and that the United Kingdom will beat its economic estimates.
He told Times Radio, “They have been wrong for the past two years, and the OECD has been wrong for the past two years as well.” I believe Britain can surpass such forecasts.
Mr. Hunt’s approach has been described as “empty” by the Institute of Directors, while the British Chamber of Commerce has called it a “recipe for disaster.”
The economic turbulence comes as the United Kingdom continues to face its largest wave of industrial action in decades, with more than 500,000 workers from seven unions on strike.
The IMF has been criticized for its inaccurately pessimistic estimates for the United Kingdom.
But its most recent downgrading will add to the rising demand from business leaders and Conservative lawmakers for Jeremy Hunt and Rishi Sunak to cut taxes and present a convincing recovery plan.
Britain will soon have the biggest tax burden since the end of World War II.
Mr. Sunak addressed the issue Tuesday when he told health care employees in Darlington, “We can’t keep putting them up; we need to start bringing them down.”
Mr. Hunt has all but ruled out tax cuts in his March budget, stating last week that he was “unlikely to have any room for manoeuvre.”
This spring, the United Kingdom will transition from having one of the most advantageous tax schemes for investment to having one of the least generous.
The corporate tax rate increases from 19 percent to 25 percent, and an investment-encouraging “super-deduction” is eliminated.
According to the IMF, the United Kingdom will have the lowest performance of all the advanced nations.
The IMF increased its global GDP prediction for 2023 to 2.9% from 2.7% in October, citing the reopening of China’s Covid market following severe restrictions as having “paved the way for a faster-than-expected recovery.”
Despite the IMF’s pessimism, UK GDP numbers have held up marginally better than analysts had anticipated, potentially preventing a recession in the fourth quarter of 2022.
A further £27.4 billion was borrowed last month, which is £16.7 billion more than the same month in 2021. It was the greatest since comparable data collection began in 1993.
At the same time, assistance for households and businesses with astronomical energy expenditures is being reduced.
Michael Fabricant, a member of the Conservative Party, stated that Mr. Hunt’s argument that “the best tax cut is an inflation cut” would not please his party.
“Colleagues will say, ‘That’s not enough, Jeremy; you need to give us more,’” he asserted.
Sir Martin Sorrell, an advertising tycoon, stated last week that while the Treasury’s purse strings must be tightened for the time being, there must be a “clear plan for future growth and tax cuts.”
According to the IMF’s assessment on the United Kingdom, the downgrade reflects “tighter fiscal and monetary policies and financial conditions, as well as still-high retail energy prices that weigh on household budgets.” It was believed that Britain, along with a few other nations, could yet benefit from pent-up demand from households that accumulated money throughout the pandemic.
In contrast to the other G7 nations, who are all predicted to achieve at least marginal growth, the report’s main conclusion on the United Kingdom is bleak.
The United States, the largest economy in the world, has been upgraded by 0.4 percentage points and is forecast to grow by 1.4% this year.
Germany’s outlook has also been revised upward, but it will grow by only 0.1%. The IMF predicts that France’s and Italy’s GDPs will increase by 0.7% and 0.6%, respectively.
The British economy is projected to rebound in 2024, but only by 0.9%, a rate that falls behind those of most developed nations.
Mr. Sunak addressed the issue Tuesday when he told health care employees in Darlington, “We can’t keep putting them up; we need to start bringing them down.”
The IMF reported that rising interest rates – as a result of central banks’ efforts to combat inflation – and Russia’s war in Ukraine continue to impede economic activity.
However, the recent reopening of the Chinese economy is anticipated to provide a boost and cause inflation to decline.
Rachel Reeves, the shadow chancellor, stated, “Britain has enormous potential, but too many indicators point to extremely challenging times for our economy, leaving us behind our peers.
The government should do everything possible to strengthen and grow the economy.
It is the only way for us to stop lurching from one catastrophe to the next as we have for far too long.
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