The UK economy is set to stage a modest recovery in 2025 thanks to falling inflation, new forecasts from the International Monetary Fund (IMF) suggest. In its latest World Economic Outlook, the body said it expected the UK economy to grow 0.5 per cent this year before picking up to 1.5 per cent in 2025, both 0.1 percentage point downgrades on its January round of forecasts.
The projections suggest the UK economy is unlikely to generate much momentum this year and will lag all G7 economies apart from Germany. Next year, however, the UK will be the fastest growing major economy in Europe. This would come after a weak performance in 2023 when the UK economy grew just 0.1 per cent due to the influence of stubborn inflation and high-interest rates.
The IMF noted the improvement in 2024 would come as “the lagged negative effects of high energy prices wane.” Looking into 2025, it said continued disinflation would allow “financial conditions to ease and real incomes to recover.” Inflation has fallen sharply from its peak of over 11 per cent, and the Bank of England is expected to start cutting interest rates later this year. According to the IMF, inflation will average 2.5 per cent over 2024 before dropping to the two per cent target next year.
“Most indicators continue to point to a soft landing,” Pierre-Olivier Gourinchas, the IMF’s director of research said. “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,” a Treasury spokesman said.
Meanwhile, IMF has warned the UK over ‘fundamental’ fiscal imbalances in policy. The UK is one of a number of major economies that need to address “fundamental imbalances” with their fiscal policy, the IMF said. The global fiscal watchdog noted that global public debt has increased to 93 per cent of GDP in 2023, nine percentage points higher than its pre-pandemic level.
By 2029, global debt is projected to be roughly equal to global output. This has primarily been driven by the US and China, where debt increased by over two and six percentage points respectively, but high interest rates and slow growth have put pressure on government balance sheets.
The IMF predicted that governments would cut back on spending slightly in the medium term, but warned this would be “insufficient” to stabilise public debt. Public spending, excluding interest payments, is still around three percentage points higher than pre-pandemic levels in advanced economies, it said.
“This spending level reflects the slow unwinding of crisis-era fiscal policies and the introduction of new support measures, alongside new industrial policy measures including subsidies and tax incentives.” With more than half the world’s population going to the polls this year, the IMF called on governments around the world to avoid “fiscal slippage” and focus on “safeguarding fiscal sustainability.
The UK is one country which is facing increasing fiscal pressure. The IMF expects that UK general government debt will rise from just over 100 per cent of GDP in 2023 to 110.1 per cent in 2029.
However, it suggested government policy risked making this worse. It suggested that the UK chancellor Jeremy Hunt’s national insurance cuts could “worsen the debt trajectory in the medium term” even though it was “part-funded by well-conceived revenue raising measures.” It said: “Population ageing and labour market mismatches are further expected to exert pressure on fiscal positions.” The IMF recommended that governments phase out legacies of crisis-era policy, such as energy support measures, while enacting reform to curb rising spending. A Treasury spokesperson said: “Thanks to our responsible action with the public finances and our progress on the economy, we have been able to cut National Insurance by a third.”
Andy Jalil
The writer is our foreign correspondent based in the UK.
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