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Britain may this year fail to achieve even the tepid growth rates recently predicted by the government’s official economic forecaster, the IMF suggested on Tuesday as it downgraded UK growth estimates.
UK gross domestic product is tipped to grow by just 0.5 per cent this year in the IMF’s latest World Economic Outlook, 0.1 point slower than its January prediction.
The forecast is the second-slowest growth rate after Germany among G7 countries and lower than the 0.8 per cent predicted by the Office for Budget Responsibility in March.
UK growth will pick up to 1.5 per cent in 2025, according to the IMF, but that is also 0.1 percentage point weaker than the fund’s January outlook.
The IMF figures underscore the difficult task that Prime Minister Rishi Sunak has in galvanising a more robust recovery before the election expected this year.
The UK’s poor growth prospects reflect the impact of multiple interest rate increases by the Bank of England, coupled with sluggish productivity and investment growth.
The IMF forecast comes as chancellor Jeremy Hunt argues the UK’s economic performance is “on the up” on a trip to Washington DC to attend the spring meetings of the fund and World Bank.
The government said it has been bolstering the UK’s performance after inflation fell from a peak of more than 11 per cent to 3.4 per cent and as wages grow more quickly than prices.
“The forecast for growth in the medium term is optimistic, but like all our peers, the UK’s growth in the short term has been impacted by higher interest rates, with Germany, France and Italy all experiencing larger downgrades than the UK,” the Treasury said.
The IMF estimates for the UK contrast with the picture for the US, which is forecast to grow by 2.7 per cent this year on the back of strongly expanding supply and demand.
The BoE’s February outlook was for even weaker growth than that predicted by the IMF, as it projected an expansion of a quarter of a percentage point this year and three-quarters next.
The IMF suggested that inflation is on track to continue falling in the UK, forecasting inflation will drop from 7.3 per cent last year to 2.5 per cent in 2024 and 2 per cent next year — the BoE’s target.
Given sluggish demand in the UK, this should leave the BoE on track to start easing interest rates from a 16-year high of 5.25 per cent later this year, the IMF said.
However, it added that it only expects two rate reductions this year, less than the cuts predicted for the US and eurozone. Official UK price growth data for March is set to be released on Wednesday.