UK set for weakest growth in the G7 next year as interest rates remain higher for longer

Growth for the UK in 2024 is expected to be the weakest of all G7 major economies, as ITV News Business and Economics Editor Joel Hills reports

The International Monetary Fund's (IMF) view of the world is far from rosy but it is getting rosier.

A year ago, the IMF's chief economist, Pierre-Olivier Gourinchas, spoke of "storm-clouds gathering" in the face of soaring inflation and predicted that "countries accounting for one third of the global economy" were poised to experience some form of recession.

Not only have most economies weathered the storm without contracting but Mr Gourinchas now speaks of "soft-landings" - by which he means that it looks possible and even likely that inflation will be successfully tamed without triggering a major downturn.

The IMF's chief economist, Pierre-Olivier Gourinchas. Credit: AP

The IMF over-estimated the impact of both the steep rise in prices in many parts of the world and the sharp increase in interest rates to contain them.

But the IMF was not alone and, on reflection, it's hard to disagree with Mr Gourinchas when he says that the resilience of countries to these economic shocks has been "remarkable".

Global growth has slowed, but it has not stalled. Around the world, higher interest rates are starting to bite.

Headline rates of inflation are falling and the IMF expects them to fall further. "Core" inflation - which excludes food and energy prices - is also declining, albeit at a more gradual pace. 

The IMF's concern is the experience of individual countries is sometimes very different. 

It expects the bounce-back in the United States to become more vigorous, but warns of a "growing global divergence".

In its view, for many emerging market and developing economies "a full recovery toward pre-pandemic trends appears increasingly out of reach".

The IMF predicts the UK will be among the weakest performing advanced economies this year and next. Credit: IMF

The IMF has downgraded its growth forecasts for the Eurozone (the 20 countries which use the Euro) and, once again, it seems pessimistic about the UK's prospects. 

The IMF forecasts the UK economy will end up growing by 0.5% in 2023 - ahead of Germany, but behind the rest of the G7 major economies.

It has also downgraded its forecast for the UK in 2024 to 0.6% - the weakest of the G7, albeit marginally stronger than the Bank of England's latest forecast of 0.4%.

The IMF blames the UK's "divergence" from other G7 nations on "tighter monetary policies to curb still-high inflation and lingering impacts of the terms-of-trade shock from high energy prices".

Put another way: It thinks inflation in the UK (currently the highest in the G7) will prove more persistent and interest rates will therefore need to remain higher for longer and growth will be weaker as a result.

On this IMF chart, the solid lines denote assumption in October 2023, while dashed lines represent assumption in April 2023. Credit: IMF

The IMF believes that hiking cycles in advanced economies are "near the peak", but suggests that rates could rise further in the UK.

According to "IMF staff calculations" Bank Rate - currently 5.25% - is envisaged to peak as high as 6% at the end of this year before beginning to fall in 2024. 

This assumption by the IMF was set based on the path of interest rates predicted by the markets in August. The expected "market path" is now lower. The IMF has taken some but not all of that decline into account.

What's striking is the IMF's projection that interest rates in the UK may well still be above 4% in five years time - settling at a higher level than in either the US or the Eurozone. 

The IMF doesn't explain its thinking in any detail and what happens next will depend on the data, of course, but anyone with a mortgage will be hoping the IMF's assumptions are proved wrong again. 

Economic forecasts rarely prove entirely correct for any individual country. They are probably best viewed as a continuous reassessment of expectations based on the latest evidence.

The IMF's latest projections are likely to exasperate the chancellor. 

Jeremy Hunt, has been luxuriating in a set of revisions published by the Office for National Statistics (ONS) last month, which show the performance of the UK economy in 2020 and 2021 was much less anaemic than had been thought.

Until recently, the recovery in the UK was perceived to have been lagging behind the other major economies, but the revisions suggest that, while still weak, growth in the UK matched growth in France and outpaced Germany.

The IMF acknowledges the revisions were "significant", but explains they were published too late to be included in this latest forecast.

And even had they been, they are unlikely to have made a meaningful difference to the near-term projections, according to IMF staff.

The UK's recent history looks less grim than it did, but that does not appear to have prompted the IMF to be more upbeat about our future.

In a statement, Jeremy Hunt said "longer term [the IMF] say our growth will be higher than France, Germany or Italy. To get there we need to deal with inflation and do more to unlock growth - which I will be focusing on in the upcoming Autumn Statement".

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