UK economy to avoid recession but inflation still a worry, IMF says

International Monetary Fund Managing Director Kristalina Georgieva arrives in Downing Street for a Cabinet meeting, in London, Tuesday, May 23, 2023. (James Manning/PA via AP)

LONDON (AP) — The British economy will avoid falling into recession this year, according to upgraded growth forecasts Tuesday from the International Monetary Fund.

In its latest assessment of the U.K. economy, the Washington-based fund said domestic demand had proven more resilient than anticipated in the face of the surge in energy costs.

The IMF now thinks the British economy will grow by a still-modest 0.4% this year partly as a result of higher wages, up from its previous prediction just a month ago of a 0.3% decline. The more positive projection came alongside warnings of a “subdued” outlook for growth and the threat posed by ongoing global uncertainty.

IMF Managing Director Kristalina Georgieva said at a press briefing in London that the latest assessment reflects “favorably” on the U.K. in comparison to other countries in the Group of Seven leading industrial nations.

“We are likely to see the U.K. performing better than Germany, for example," she said.

Despite the more upbeat assessment, the IMF said inflation is likely to remain stubbornly high over the coming years and only return to the Bank of England's target of 2% in mid-2025, six months longer than it predicted earlier this year.

Like other central banks, the Bank of England has been raising interest rates aggressively over the past 18 months or so to a 15-year high of 4.5% after inflation spiked sharply, first because of bottlenecks caused by the coronavirus pandemic and then Russia's invasion of Ukraine, which sent energy and food prices surging.

Figures on Wednesday are expected to show inflation in Britain falling back below 10% for the first time since August, largely because the sharp spike in prices caused by the invasion of Ukraine will fall out of the annual comparison.

Andrew Bailey, governor of the Bank of England, told lawmakers on Tuesday that inflation had “turned the corner."

The IMF also praised the British government for reestablishing credibility following the “stress episode” of last September’s big tax cuts of the short-lived government of former Prime Minister Liz Truss.

That mini-budget led to a sharp increase in borrowing costs and fears about the viability of some pension funds as financial markets questioned the government's unfunded tax cuts.

Truss' premiership soon came to an end and the Conservative Party promoted Rishi Sunak to take the helm. He and his Treasury chief, Jeremy Hunt, made it their priority to restore faith in Britain's finances by reversing those tax cuts and tightening spending.

Hunt said the IMF report vindicated the government’s efforts to “restore stability" but that the “job is not done yet.”

With a general election set to take place next year and the Conservatives trailing heavily in the opinion polls, the pressure is mounting on Sunak to cut taxes, a course that IMF cautioned against taking.

“Of course, it is attractive to look into ways in which the tax burden is lighter, to inject more investment opportunity," Georgieva said. “But only when it is affordable — and at this point of time, neither it is affordable nor it is desirable."