The International Monetary Fund (IMF) has revised its previous assertion of a potential recession in the UK this year, raising the country’s growth forecasts for the second consecutive month.
Now, the IMF anticipates that the UK will experience a growth of 0.4% this year, a substantial turnaround from last month’s forecast of a 0.3% contraction. This latest estimate improved even from a pessimistic projection following October’s mini-budget, has the UK escaping the expected position of being the worst-performing major economy this year.
However, the IMF cautions that the UK’s long-term growth trajectory remains considerably under pre-financial crisis levels.
The IMF attributes the optimistic near-term adjustment to an unexpectedly robust resilience in both demand and supply, supported by a healthier job market and decreasing energy prices.
In its annual assessment of the UK economy, the IMF commented, “With demand staying robust in the face of declining energy prices, we foresee the UK economy averting a recession and maintaining a positive growth trajectory in 2023.”
Jeremy Hunt welcomed the forecast as a “significant upgrade,” but the Chancellor indicated that he would persist with his plan of implementing tax increases to achieve his objective of halving inflation this year.
The IMF pointed out that the stronger growth might necessitate the Bank of England to continue its trend of hiking interest rates from the current 4.5% level. In an effort to control the persistently high inflation, which was recorded at 10.1% in March, Threadneedle Street has already instigated a series of twelve interest rate increases.
Data set to be released this Wednesday are projected to reveal a deceleration of inflation to approximately 8.4 percent in April.
Despite this, the International Monetary Fund (IMF) cautioned against any immediate jubilation in the battle against inflation. It suggested that inflation will likely meet the Bank’s 2 percent objective only around the middle of 2025, as it foresees an additional two years of elevated inflation.
The IMF elaborated, “The study of past inflation shocks suggests that high inflation tends to be enduring, especially following significant terms-of-trade shocks…additional monetary constriction might be required”.
Furthermore, the IMF urged policymakers to eliminate stamp duty, arguing that it is a barrier to people relocating and changing jobs.
The IMF reiterated its recommendation for the Conservatives to abolish the triple-lock mechanism to safeguard the National Health Service (NHS). It cautioned that the existing triple-lock on pensions is inconsistent with a sustainable NHS.
According to the IMF, the triple-lock on pensions ought to be substituted by a straightforward correlation with prices. The recent yearly state pension has increased by 10.1 percent due to surging inflation and is now at £10,000.
The Fund has given its support to Mr Hunt’s proposals to elevate taxes and reduce expenditure as a short-term measure to mitigate inflation. However, it has urged the Chancellor to direct more attention to growth. The IMF has suggested that Mr Hunt expand tax incentives for businesses and minimize amendments to regulations.
Furthermore, it advocated for the abolition of stamp duty and recommended a more comprehensive reformation of the council tax.
The government was urged to “shift away from transaction taxes, which limit housing and labor mobility; and enhance the tax system’s efficiency and fairness by abolishing loopholes in wealth and income taxation, and national insurance contributions.”
The IMF cautioned that additional funds will be required to fulfill “potential wage settlements in the face of ongoing industrial action; to address established issues in the National Health Service (NHS) and social care; and to boost growth potential through public investments in skills, innovation.”
The Fund has, in the past, alerted that drastic rises in public wages lead to increased borrowing costs and inflation.
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