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UK to be only developed economy to shrink in 2023

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In its latest World Economic Outlook, the International Monetary Fund (IMF) has highlighted that the UK will be the only major economy to shrink this year, noting that even Russia will have stronger growth.

High inflation, tightened monetary policies and sky-high energy prices mean that the UK will be the only advanced economy to experience negative growth in 2023, according to the IMF.

The IMF, which is the United Nations’ major financial agency, said in its latest economic outlook report, that growth in the UK is projected to be –0.6% in 2023, a 0.9 percentage point drop from October, “reflecting tighter fiscal and monetary policies and financial conditions, and still-high energy retail prices weighing on household budgets.”

This compares unfavourably with other advanced economies, which the IMF stated will rise on average by 1.2% in 2023. Although it does add that 90% of advanced economies are projected to see an overall decline in growth in 2023 none will enter negative territory bar the UK.

Speaking to the BBC, IMF chief economist, Pierre-Olivier Gourinchas noted that the UK had “one of the strongest growth numbers in Europe last year…but this year’s forecast reflected its high dependence on liquid natural gas, which had driven up the cost of living”.

Gourinchas added that the plans outlined by the Treasury in the months since October’s disastrous mini Budget showed the UK was “certainly trying to carefully navigate these different challenges and we think that they are on the right track”.

Politicians and experts respond to the IMF findings

Chancellor Jeremy Hunt responded to the forecast by explaining that the UK’s longer-term financial prospects were still stable.

He said: “The governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted, however these figures confirm we are not immune to the pressures hitting nearly all advanced economies.

“Short-term challenges should not obscure our long-term prospects – the UK outperformed many forecasts last year, and if we stick to our plan to halve inflation, the UK is still predicted to grow faster than Germany and Japan over the coming years.”

However, Labour’s shadow Chancellor Rachel Reeves was understandably less optimistic.

She said: “This [research] points to difficult times for our economy. Britain has so much potential. But we’re being held back and lagging behind. The Government should be doing all it can to make our economy stronger.”

And overall, analysts tended to agree with Reeves’ assessment of the situation.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: “The IMF now expects the UK economy to shrink by 0.6% this year, which is a stark downgrade from previous expectations. This is a direct contrast to other major economies that have seen their outlooks upgraded because of resilient consumer demand.

“The UK is facing some specific problems, including its over-exposure to high energy retail prices, which are weighing on household budgets. The UK also has a significant labour problem, which was initially caused by Brexit but has been made worse by a shrinking workforce since the pandemic.”

However, she did attempt to inject a note of optimism, saying: “There’s a chance the UK could muster a better performance than the IMF is predicting, given upgrades to expectations from other bodies in recent months. The market will remain very sensitive to interest rate and inflation readings until we have a clear path out of the stagnation.”

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