IMF expects UK economy to avoid recession

The UK economy is expected to avoid a recession this year, the International Monetary Fund has said, after it sharply upgraded its growth forecast.

It now expects the UK to grow by 0.4% in 2023, whereas last month it forecast the economy would contract by 0.3%.

Growth would be helped by “resilient demand” and falling energy prices.

But the IMF said inflation “remains stubbornly high” and that higher interest rates will need to remain in place if it is to be brought down.

It also noted that the risks for the UK economy are “considerable”, with the biggest danger “greater-than-anticipated persistence in price- and wage-setting”, which would keep inflation higher for longer.

The IMF also added that the UK must address the record numbers of people not working, many of whom have long-term illnesses.

Chancellor Jeremy Hunt said the IMF statement “credits our action to restore stability and tame inflation” and added 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.”

Pat McFadden, Labour’s shadow chief secretary to the Treasury, said the report revealed “the fragility of the UK economy, highlighting the slowdown in economic activity since last year and stubbornly high prices”.

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

However, it noted that while outlook for growth had improved in recent months, it “remains subdued”.

The IMF forecasts the economy will 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, which is later than it had forecast previously.

“Further monetary tightening will likely be needed,” the agency said, and interest rates “may have to remain high for longer to bring down inflation more assuredly”.