IMF: UK the Only G7 Country to Experience Economic Contraction This Year

[Asia Economy Reporter Yujin Cho] The International Monetary Fund (IMF) has forecast that the United Kingdom will be the only country among the Group of Seven (G7) to experience economic contraction this year. Amid nearly a decade of concerns over low growth, there are even fears that the longest period of stagnation since the global financial crisis could occur.

In its World Economic Outlook (WEO) report released on the 30th (local time), the IMF projected that the UK's economic growth rate this year will be -0.6%, marking a contraction. This is a downward revision of 0.9 percentage points from the figure announced in October last year.

The IMF cited reasons for this outlook on the UK economy, including government spending cuts and a worsening cost-of-living crisis due to high interest rates and tax increases.

Although inflation has slowed due to the government's introduction of an energy price cap, it still exceeds 10%. Additionally, inflationary pressures remain due to rising energy supply costs and other factors.

The IMF predicted that the UK will be the first country to enter a recession since the 2008 financial crisis and will face the bleakest two years through 2024.

Compared to other European countries, the UK has shown relatively weak economic recovery from the COVID-19 pandemic through the energy crisis.

Furthermore, former UK Prime Minister Liz Truss's reckless tax cut plan amounting to ?45 billion (approximately 68 trillion KRW) during her tenure in September increased borrowing costs for businesses and households, contributing to sluggish growth. The IMF forecasted that consumption, which drives the UK economy, is unlikely to improve quickly due to high interest rates, and businesses are also insufficient to lead growth.

The Bank of England (BOE), like other central banks, is responding to high inflation and is expected to raise the base interest rate by 0.5 percentage points to 4.0% on the 2nd.

The IMF projected, "The UK will be the only G7 country to show negative economic growth this year, while the United States (1.4%), Germany (0.1%), France (0.7%), Italy (0.6%), and Japan (1.8%) will record growth rates."

[Image source=Reuters Yonhap News]

The IMF raised its global economic growth forecast for this year to 2.9%, up 0.2 percentage points from the previous projection. It did not lower the growth forecasts for other G7 countries excluding the UK.

The IMF expects the global economic growth rate this year to be higher than previously anticipated due to inflation easing from central banks' tightening policies and China's reopening.

Previously, in its October report last year, the IMF had forecast a 2.7% global economic growth rate for this year, which has now been revised upward by 0.2 percentage points.

Pierre-Olivier Gourinchas, Chief Economist at the International Monetary Fund, said, "Due to the fight against inflation and the burden from Russia's war in Ukraine, growth will be weaker compared to the historical average (3.8%)," but added, "the global economic outlook is less pessimistic than the forecast made last October."

He also predicted that this year could mark a turning point where growth bottoms out and inflation decreases.

By country, the United States is expected to record economic growth rates of 1.4% this year and 1.0% next year, while China is projected to grow by 5.2% this year and 4.5% next year. The US economy, estimated to have grown by 2% last year, saw its growth forecast for this year increase by 0.4 percentage points compared to the October forecast, while next year's forecast dropped by 0.2 percentage points.

The IMF cited sustained domestic demand recovery this year and the Federal Reserve's sharp interest rate hikes next year as reasons for these forecast adjustments.

The IMF estimated that China's growth rate last year was 3%, 0.2 percentage points lower than previously forecast, due to a slowdown in real GDP in the fourth quarter of last year.

This is lower than the global economic growth rate last year, marking the first time in about 40 years that China's economic growth rate has fallen below the global average, according to the IMF.

Russia's economic growth rate, following its invasion of Ukraine, was -2.2% last year and is expected to be 0.3% this year and 2.1% next year.

Regarding inflation, some improvements are noted, but most regions have yet to reach their peak.

Specifically, the IMF expects inflation to ease in 84% of countries overall. Global inflation is projected to be 6.6% this year and 4.3% next year, down from 8.8% last year. However, these figures remain higher than the pre-COVID-19 pandemic period of 2017?2019 (approximately 3.5%).

The projected decline in inflation is attributed to falling fuel and raw material prices due to weak demand and the cooling effect of monetary policy on core inflation.

Core global inflation, excluding volatile energy and agricultural products, is expected to decrease from 6.9% year-on-year in the fourth quarter of last year to 4.5% in the fourth quarter of this year.

However, the IMF expects monetary tightening policies to fully take effect only after 2024.