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UK to avoid recession — but there's a catch

UK economy: The Royal Exchange on Cornhill by the Bank of England, City of London, UK
UK economy: The IMF anticipates UK GDP to rise by 0.4%, rather than shrink by 0.3%. Photo: PA/Alamy (Monica Wells)

The International Monetary Fund (IMF) said it no longer expects Britain's economy to fall into a recession this year and has upgraded its forecasts.

It now anticipates the UK economy to grow by 0.4% in 2023, rather than shrink by 0.3% as the IMF had forecast in April.

"UK authorities have demonstrated their ability to overcome hurdles in difficult times," IMF managing director Kristalina Georgieva said at a press conference on Tuesday.

However, Georgieva warned significant risks to the UK's economic outlook remain as the global economy looks uncertain, and said a sudden tightening of global financial conditions could strain credit and export demand, and depress GDP.

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She further highlighted that the biggest danger was "greater-than-anticipated persistence and price and wage-setting", which would keep inflation higher for longer.

Read more: UK inflation set to fall back into single digits

It was also noted that the UK must address the record numbers of people not working, many of whom have long-term illnesses.

Georgieva said the elevated inflation reflected the impact of the shock from Russia’s war in Ukraine and the tight labour markets that are still recovering from the COVID-19 pandemic.

However, the IMF expects the impact of these factors to ease with tight monetary policy to bring inflation down.

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

UK chancellor Jeremy Hunt said at the press conference: “Today’s IMF report shows a big upgrade to the UK’s growth forecast and credits our action to restore stability and tame inflation.”

“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.”

Read more: Interest rates may rise despite inflation falling, says Bank of England's Bailey

IMF forecast for 2024 to 2026

The IMF further forecast the economy to 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, later than it had previously forecast.

The latest IMF forecasts follow official figures revealing how much money the UK government borrowed. UK borrowing hit £25.6bn in April — the second-highest borrowing figure for the month since records began in 1993.

Watch: IMF dramatically upgrades outlook for UK economy but says more cost of living pain to come

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