UK Expected to Be Only Major Economy to Contract in 2023: IMF

People walk past the Bank of England during morning rush hour, in London, on July 29, 2021. (Henry Nicholls/Reuters)

The UK will be the only major economy to shrink this year, performing worse even than sanction-hit Russia, the International Monetary Fund (IMF) has warned.

In its latest World Economic Outlook update, the IMF upped its growth outlook for the global economy, but downgraded its UK GDP forecast once again, predicting a contraction of 0.6 percent against the 0.3 percent growth pencilled in last October.

According to this forecast, the UK will be far behind its counterparts in the G-7 group of advanced nations. The IMF’s 2023 GDP predictions show growth of 1.4 percent in the United States, 0.1 percent in Germany, 0.7 percent in France, 0.6 percent in Italy, 1.8 percent in Japan, and 1.5 percent in Canada.

The UK is expected to be the only country, across advanced and major emerging economies, to suffer a year of declining GDP. Even Russia, which is under pressure from a raft of sanctions, is predicted to grow its economy by 0.3 percent.

The IMF said Britain’s predicted GDP fall reflects “tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets.”

‘On the Right Track’

IMF Chief Economist Pierre-Olivier Gourinchas explained there were three primary factors driving the UK’s economic outlook.

He said: “First, there is exposure to natural gas … we’ve had a very sharp increase in energy prices in the UK. There is a larger share of energy that is coming from natural gas, with a higher pass-through to final consumers.

Chancellor of the Exchequer Jeremy Hunt leaves Downing Street following the first Cabinet meeting with Rishi Sunak as prime minister, in London on Oct. 26, 2022. (Victoria Jones/PA)

“The UK’s employment levels have also not recovered to pre-pandemic levels. This is a situation where you have a very, very tight labour market but you have an economy that has not reabsorbed into employment as many people as it had before. That means there is less output, less production.

“The third is that there is a very sharp monetary tightening because inflation has been very elevated, that’s a side effect of this high pass-through of energy prices.”

But Gourinchas told the BBC that UK government is “certainly trying to carefully navigate these different challenges and we think that they are on the right track.”

The IMF has upgraded its forecast of UK economic growth for 2024 from 0.6 percent to 0.9 percent.

UK ‘Will Outperform’ Forecasts

Chancellor of the Exchequer Jeremy Hunt said: “The governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted, however these figures confirm we are not immune to the pressures hitting nearly all advanced economies.

“Short-term challenges should not obscure our long-term prospects—the UK outperformed many forecasts last year, and if we stick to our plan to halve inflation, the UK is still predicted to grow faster than Germany and Japan over the coming years.”

Prime Minister Rishi Sunak’s official spokesman stressed that the IMF said that UK economic policy is now “on the right track.”

Reacting to the prediction that even Russia would outperform the UK this year, the spokesman said: “When it comes to Russia, specifically, my understanding is that their numbers are boosted largely due to oil and gas windfall, but December’s sanctions on Russian crude oil and upcoming sanctions on refined oil have the potential to severely constrain revenues needed to finance its war in 2023.

“A thousand businesses have left or are leaving Russia, undoing significant foreign investment made since the fall of the Soviet Union. They are starved of key goods and technology.”

Government minister Richard Holden argued the IMF has been “wrong” before and the UK will outperform its economic forecasts.

He told Times Radio: “They’ve been wrong in the last two years, the OECD were also wrong over the last two years. I think Britain can beat those predictions.”

‘Bottom of the League Table’

But the main opposition Labour Party has blamed the grim outlook on the Conservative government’s economic management.

Labour’s shadow chancellor Rachel Reeves said: “The UK economy has got huge potential and yet the government is failing to seize that initiative.

“We see today with these forecasts from the IMF the UK at the bottom of the league table for growth both this year and next. The government needs to be doing so much more to fulfil the potential of the UK economy.”

Asked about the IMF’s past forecasts failing to materialise, Reeves said that did not take away from the “facts” about the UK economy’s performance under 13 years of Conservative rule.

She said: “The average growth in the UK economy has been just two-thirds under the Conservatives than it was under the last Labour government.

“And the UK is now the only major economy to be smaller today than it was before the COVID pandemic hit.”

PA Media contributed to this report.