The UK will escape a recession this year, the IMF said on Tuesday, adding that the country’s economy had been “buoyed by resilient demand in the context of declining energy prices”.
But the fund cautioned that Britain risked being stuck with persistent inflation unless interest rates stayed high for longer.
“Economic activity has slowed significantly from last year and inflation remains stubbornly high,” the fund said, adding that “the outlook for growth, while improving somewhat in recent months, remains subdued”.
The IMF predicted earlier this year that the UK economy would shrink by 0.5 per cent between the final quarter of 2022 and the final quarter of this year.
But, in a significant upgrade, it said the economy was now set to expand 0.4 per cent in 2023, reflecting stronger wage growth, more supportive fiscal policy and a faster easing in the global pressures of energy prices and supply chain blockages.
It expects gross domestic product to grow 1 per cent in 2024 and to average 2 per cent in 2025 and 2026.
But the IMF warned inflation was now set to remain above the Bank of England’s 2 per cent target for six months longer than it had forecast last month, until mid-2025.
“Some further monetary tightening will probably be needed and rates may have to remain higher for longer,” it said.
The fund warned against “premature celebrations”, with the risk that high energy prices would be replaced by more persistent price and wage pressures that could lead inflation to “plateau” at an elevated rate.