Treasury unhappy

IMF defends gloomy forecast for UK economy

scottish economy
The Treasury disputes the IMF’s forecast for the economy

Interest rates will have to rise at least once more and remain at current levels through most of next year, according to an International Monetary Fund (IMF) assessment of the UK economy.

It expects the Bank of England to lift the base rate by 25 basis points to 5.5% and the UK to have the highest inflation and slowest growth among the G7 economies.

Pierre-Olivier Gourinchas, the IMF’s chief economist, said: “The general perspective on the UK is fairly subdued growth momentum, the labour market cooling, but inflation remains quite persistent.

“That is going to require monetary policy to remain tight for a while longer into next year.”

The IMF has downgraded its UK growth forecast next year to 0.6% from 1% that it forecast in July.

The Treasury questioned the IMF’s forecast saying it had failed to take account of recent revisions in the UK economy and the potential impact of the Israel-Gaza conflict on oil supplies.

Chancellor Jeremy Hunt said: “The IMF have upgraded growth for this year and downgraded it for next but longer term they 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.”

Government sources suggested the IMF had not taken into account the fact that expectations for market interest rates had fallen in recent weeks, and that the Office for National Statistics (ONS) had upgraded its assessment of the UK’s post-pandemic recovery.

Mr Gourinchas defended the IMF’s report, saying: “We’re above the Bank of England estimate [for growth] for next year, so I don’t think we are particularly pessimistic. I think we’re trying to be honest interpreters of the data here.”

The IMF accepted that the global global economy is showing resilience against world tensions such as China’s property crisis, volatile commodity prices, climate change and the war in Ukraine.

“We see a global economy that is limping along and it’s not quite sprinting yet,” it said.

In July last year, it forecast that the UK economy would grow by 3.2% in 2022. It revised that upwards to 4.1% at the start of this year.

But official UK figures released last month estimated that the country’s economy expanded by 4.3% in 2022 – considerably more than the IMF’s initial estimate.

Manufacturers in Scotland are the most optimistic in the UK about the year ahead, despite inflation concerns, according to research from restructuring firm FRP Advisory.

It found that 96% of Scottish manufacturers are confident about their ability to trade over the next year, compared with the UK average of 87%.

They still face challenges, with 29% citing energy costs as their biggest issue and 23% concerned about wages.

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