Not out of the woods: UK set to be 2nd bottom economy in G7 despite upgraded IMF prospects

In the International Monetary Fund’s (IMF) July 2023 ‘World Economic Outlook’, the IMF upgraded the UK’s annual economic output prospects by 0.7%, raising the growth rate prediction from -0.3% in April’s projection to 0.4% in the new July outlook. Looking further ahead, output is set to increase in 2024 by 1%.

Jeremy Hunt, Chancellor of the Exchequer, noted in a press conference that the 0.4% outlook was higher than the Bank of England’s prediction of a growth of 0.25% in 2023.

Forecasts in the IMF’s reports have grown in optimism due to: “stronger-than-expected consumption … investment [following] falling energy prices, [and] lower post-Brexit uncertainty following the Windsor Framework agreement”. For reference, the Windsor Framework of 2023 aims to reduce trade frictions between the EU Single Market and the UK under the current Northern Ireland Protocol.

Similar numerical estimates were made within KPMG’s June 2023 ‘UK Economic Outlook’, which forecasted a 0.3% increase in real GDP in 2023 and a 1.1% increase in 2024. A resilient labour market, a more stable global environment, and declining energy prices were justifications also expressed by the IMF.

Browsing the UK’s economic indicators, which have not long ago been consistently flashing red, we find that average petrol and diesel prices decreased by 22.7% in the year to June 2023, helping to ease inflation which recently dropped to 7.9% from May’s 8.7% figure. Furthermore, household final consumption expenditure has nearly recovered from pandemic lows, only exhibiting a -2.27% drop according to the ONS.

Whilst the IMF’s new prediction may be a sign of hope in a largely pessimistic period, the improved prospects only shift the UK from having the worst to the second-worst prediction of the G7

Whilst the IMF’s new prediction may be a sign of hope in a largely pessimistic period, the improved prospects only shift the UK from having the worst to the second-worst prediction of the G7. Britain is now only ahead of Germany, which is set to face a projected negative figure of -0.3%. The IMF anticipates a contraction based upon monetary tightness, the effects of the recent energy shock from the cut off from Russian fuel supplies, and “weakness in manufacturing output”.

The United States is forecasted to lead the G7 with a growth of 1.8%, followed by Canada’s 1.7%, Japan’s 1.4%, Italy’s 1.1%, France’s 0.8%, the UK’s 0.4% and Germany’s 0.3% contraction. For context, advanced economies across the world (classified by the IMF as EU, G7, and other developed economies) are set to grow by 1.5% on average.

IMF Managing Director Kristalina Georgieva praised the UK government for a “decisive” and “responsible” response, however warned of an “uncertain” global economic environment. There was a particular focus on a potential tightening of global financial markets, which could constrain export capabilities and credit accessibility.

On top of that, Kristalina Georgieva argued for the maintenance of tight monetary policy to keep a lid on inflationary pressures, which would reduce real incomes for households and erode savings, as seen in the ongoing cost of living crisis.

Controlling inflation remains a top priority for the Treasury. In his Mansion House speech on 10 July, the Chancellor reaffirmed a commitment to: “delivering sound money … that means taking responsible decisions on public finances, including public sector pay, because more borrowing is itself inflationary.”

More recently on 25 July, the Treasury stated: “the IMF also says it’s important to rebuild our finances and maintain financial stability; that’s why we have a clear plan to halve inflation this year, grow the economy, and get debt falling.” Whilst it is true that inflation has fallen to 7.9% as of June 2023, a figure lower than the 8.2% inflation rate predicted by Reuters, inflation still remains nearly four times the 2% target set by the Bank of England.

Thus, a painfully high base rate is necessary in order to encourage saving and increase the cost of borrowing to cool the economy and inflation down, helping to reduce the cost of living

Thus, a painfully high base rate is necessary in order to encourage saving and increase the cost of borrowing to cool the economy and inflation down, helping to reduce the cost of living. However, the Bank of England finds itself in a dilemma as maintaining high-interest rates can stifle investment and business activity, with the Trades Union Congress (TUC) attributing the disappearance of 120,000 jobs across 11 sectors as being partly caused by “skyrocketing” interest rates.

Ultimately, Britain is not out of the woods despite an IMF upgrade. Caught in a dilemma between stifling interest rates necessary to reduce a towering inflation rate and the effects high-interest rates have on output and employment, careful use of fiscal and monetary policy is required to steer the UK out of its current predicament.