IMF expects UK to dodge recession this year but warns on 'stubborn' inflation

Wed 24 May 2023
Posted by: Phillip Adnett
Trade News

Inflation sign going up

The International Monetary Fund (IMF) has sharply upgraded its growth forecast for the UK and now expects the British economy to avoid a recession this year, but cautions against “premature celebrations” on inflation.

It predicted the UK economy to grow by 0.4% in 2023, having forecast a contraction of 0.3% last month.

The BBC reports IMF comments that inflation “remains stubbornly high” and that higher interest rates will be needed to bring it under control.

Kristalina Georgieva, IMF’s managing director, said that the government had taken swift action to resolve concerns over financial stability in March.

Change of direction

“We have to recognise that … there has been a very significant turnaround in policy,” she said, adding that Westminster had put relations with the EU on a more predictable path and rose above the “political fray” on fiscal policy.

However, the IMF cautioned against “premature celebrations” and warned that inflation was set to remain above the Bank of England’s (BoE) 2% target until mid-2025 – six months longer than it had forecast last month, according to the FT.

Latest figures from the Office for National Statistics show the UK recorded the sharpest fall in inflation since the cost-of-living crisis began, down to an annual rate to 8.7% in April, although food prices continued to rise at the fastest pace in 45 years.

Inflation down but not out

The Guardian reports that City of London economists had forecast a bigger decline in April to 8.2%.

There is also concern from economists that core inflation rate rose from 6.2% to 6.8% over the same period, suggesting there is more underlying inflationary pressure than hoped. Yael Selfin, chief economist at KPMG UK, told the FT that “inflationary pressures remain sticky”.

The BoE will also remain worried about the persistence of high inflation in Britain’s services sector, where prices increased at a rapid pace in May, according to Reuters.

Inflation has impacted services firms’ costs and their prices edged higher as a result, although they are down on peaks seen after Russia invaded Ukraine last year, a preliminary ‘flash’ reading of the S&P Global/CIPS UK Purchasing Managers’ Index (PMI) showed.

Container production fall

Meanwhile, global production of shipping containers has fallen by 71% as demand for goods sank following the easing of pandemic restrictions.

The FT reports figures from maritime research consultancy Drewry that show that the industry has slashed production of 20-foot equivalent units from 1.06m to 306,000 between the first quarter of 2022 and the same period this year, as demand for exports has waned since the removal of pandemic restrictions.