As per the International Monetary Fund’s anticipation, Britain can no longer expect a recession this year. On Tuesday, it praised the government for taking constructive steps to stabilize the economy, fight inflation, and warn against pre-election tax cuts.
Correcting its prediction of gross domestic product contracting by 0.3% in April, the IMF now expects growth of 0.4% in 2023. Although the earlier prediction was rather weak for a developed economy this year, the new growth projection for Britain would surpass some of the rich economies, including Germany.
Even though the outlook remains subdued, as warned by the IMF, it has praised Prime Minister Rishi Sunak’s government for taking corrective steps compared to former premier Liz Truss’s policies for the economy.
“The UK authorities have taken decisive and responsible steps in recent months,” IMF Managing Director Kristalina Georgieva conveyed in a press conference on Tuesday.
“What we see is that the government is prioritizing, and rightly so, the fight against inflation.”
After a brief chaotic situation created by Truss’s team, it was sorted out by Sunak’s leadership after he took over the office in October.
According to the IMF, several factors contributed to Britain’s improved assessment, including the unexpected durability of demand, which was aided by faster-than-average wage growth, higher government spending, and elevated business confidence.
The decline in energy costs after a sharp surge last year and the normalization of global supply chains also helped, the IMF said.
Georgieva praised the present administration for giving fiscal responsibility a priority and cautioned Hunt against letting political considerations trump budgetary considerations.
“Of course it is attractive to look into ways in which the tax burden is lighter, to inject more investment opportunity, but only when it is affordable,” Georgieva conveyed. “And at this point of time, neither is it affordable nor is it desirable.”
While the opposition Labor Party is leading in opinion polls, Hunt is expected to feel the heat within his Conservative Party regarding the tax cut in time, as elections are expected to be held late in 2024.
British inflation is expected to decline roughly by 5% by the end of this year compared to 10% more in March and return to its original 2% by mid-2025, as per the IMF’s projection. This roughly aligns with the forecast predicted by the Bank of England this month.
It anticipates that the economy will expand by 1% in 2024 and 2% in the following two years before slowing down to a long-term growth rate of about 1.5%.
The IMF further added that the growth potential of Britain could improve by taking active measures to tackle long-term illness impacts on the labor force and mitigating policy and regulatory uncertainties that are badly impacting business investments.
The analysis also suggested that a “more measured” approach to removing EU law and a revised agreement with the EU on trade relations with Northern Ireland after Brexit would bolster investment.
According to the IMF, the biggest near-term concerns for Britain’s economic outlook are increased persistence in inflation and the associated unsustainable growth in wages. The BoE should make sure that monetary policy is kept tight.
“This said, elevated uncertainty about the macroeconomic outlook and inflation persistence merits continuous review of the pace and magnitude of monetary tightening,” the IMF further added.
For the 12th consecutive meeting, the Bank of England has increased its borrowing costs, bringing rates to 4.5% this month, which the financial markets are predicting will increase to 5% this year.
- Published By Team Timeswire