Economy

IMF cuts UK growth forecast as inflation persists

Red Sea
Disruption to shipping is one of the factors causing a revision to forecasts

The International Monetary Fund (IMF) has cut its growth forecasts for the UK economy this year from 0.6% to 0.5% and warned that rising energy prices and disruption to international shipping risk “stalling” declines in inflation in leading economies.

It has told central banks that the “last mile” of their battle against price rises may be the hardest amid evidence that the slowing of inflation have stalled in some countries and that underlying inflation may be persistent in some sectors.

Price growth has been stubbornly high in the US which has recorded two consecutive months of rising prices on the back of a strong economy and a burgeoning labour market.

Inflation in the eurozone has fallen steadily to 2.4% and figures due on Wednesday are likely to show another decline in Britain’s headline consumer prices inflation from 3.4% to 3% in March.

The Bank of England believes inflation will fall temporarily below its 2% target in April before ending the year at just above 2%.

In the light of persistent inflationary pressures, markets have re-assessed their expectations for interest rate cuts and now expect only one or two interest rate reductions from the US Federal Reserve and the Bank of England this year.

The IMF sees the UK ranked sixth among G7 nations in terms of forecasted economic growth this year, with only Germany showing weaker growth.

The US, Spanish and Canadian economies are expected to grow by as much as 2.7%, 1.9% and 1.2% in the meantime respectively.

The UK economy grew by a mere 0.1% growth last year but the IMF believes it will climb by 1.5% next year as inflation falls towards the Bank of England’s targeted 2%.

A Treasury spokesman said: “Today’s report shows we are winning the battle against high inflation, with the IMF forecasting that it will fall much faster than previously expected.

“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.

“With inflation falling, wages rising, and the economy turning a corner, we have been able to lower taxes for 29 million people, as part of our plan to reward work and grow the economy.”

Unemployment rises

The prospect for interest rate cuts was further muddied by data showing rising unemployment and slowing wage growth which points to cut in the cost of borrowing.

The UK unemployment rate rose in the three months to February to 4.2% from 4% in the previous quarter, while year-on-year growth in average earnings topped expectations.

January’s three-month reading was upwardly revised slightly from 3.9%. The latest quarterly figure was higher than the 4% forecast.

The Office for National Statistics noted average growth in regular earnings, which excludes bonuses, cooled slightly to 6% in the three months to February from 6.1% in the same period to January.

Including bonuses, average earnings rose 5.6%, in line with the growth seen in the three months to January, and above consensus of a 5.5% climb.

Inflation figures due on Wednesday are expected to show the rate eased further to 3.1% last month.

Scotland’s unemployment rate for people aged 16 and over was 4% down — down 0.4 percentage points over the quarter from December 2023 to February 2024.



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