The International Monetary Fund says that the UK economy will be one of the worst of any major country this year (IMF).
It says that out of the 20 largest economies, known as the G20, the UK economy will do the worst in 2023. Sanctions are put on Russia, which is part of this group.
The IMF thinks the UK economy will shrink this year, which is better than it said before.
It also said that the world’s financial system would have a “rocky road” ahead of it.
It comes after two US banks went bankrupt last month, and its rival, UBS, quickly took over the huge Swiss bank Credit Suisse, which made people worry about another financial crisis.
The IMF had already said that the UK economy would be at the bottom of the G7 and have a recession this year. The G7 is a group of the seven largest so-called “advanced” economies in the world, which control global trade and the international financial system. In 2022, the UK was at the top when the group got better after the pandemic.
It now thinks the UK economy will shrink by 0.3% in 2023 and grow by 1% the following year.
Even though the IMF thinks the UK economy will do the worst this year, its latest prediction is better than the 0.6% drop it thought it would see in January.
Researchers from the IMF have said that Britain’s bad economic performance is due to its exposure to high gas prices, high-interest rates, and slow trade.
Forecasts try to show what is most likely to happen in the future, but sometimes they need to be changed. For example, a study of recessions worldwide from 1992 to 2014 showed that the IMF’s previous forecasts caught less than 10% of recessions a year before they happened.
But Rachel Reeves, the shadow chancellor for Labour, said that the estimates showed “how far behind the rest of the world we still are.”
Sarah Olney, a spokeswoman for the Liberal Democrats in the Treasury, said the prediction was “another damning indictment of this Conservative government’s record on the UK economy.”
Several experts think there is less chance of a recession in the UK this year. Most of the time, an economy is in a recession if it shrinks for two three-month periods in a row.
The independent OBR (Office for Budget Responsibility) now thinks the UK economy will shrink by 0.2% this year but not go into recession.
The head of the Bank of England, Andrew Bailey, recently said that he was “much more hopeful” about the economy and that it wouldn’t go into recession immediately.
After the energy shocks of the pandemic and the Ukraine war, the world economy is returning to normal.
But the IMF said there were worries about how the recent instability in global banking markets would affect the whole world.
The IMF now thinks that the world’s growth will slow from 3.4% in 2022 to 2.8% in 2023 and then rise to 3% in five years.
But it said that if there was more stress in the financial sector, growth this year could slow even more.
The UK economy is likely to see a drop in interest rates
Separately, the IMF said that low productivity and aging populations mean that it expects real interest rates, which take inflation into account, in the world’s largest economies to fall to levels seen before the global financial crisis.
To fight inflation, which is the rate at which prices are going up, central banks in the US, UK, Europe, and other places have been raising interest rates.
Because food and energy prices are going up so quickly, inflation in the UK has been at its highest level in almost 40 years. The Bank of England has been hiking interest rates because of this. They went up to 4.25 percent last month.
But the IMF said in a blog post that recent increases in real interest rates are likely to be temporary.
The IMF’s observation that interest rates are going down won’t help mortgage holders who are having trouble right away.
The analysis comes with a pretty big catch: it only works after the current period of high inflation is over and only if governments keep track of their debts. Moreover, the report says that it could take a long time for interest rates to go back to where they should be after a pandemic.
But it shows that what we consider a “normal” interest rate has gone down in the UK economy and other advanced economies over the next few years and decades.
When inflation is considered, a more normal real rate is close to 0. If inflation returns to its goal level of 2%, the Bank of England base rates should be around 2-3%, not over 4% as they are now.
Read Also: The UK inflation problem explained
Aging, migration, tax and spending policies, and economic growth are all long-term factors that affect these trends. But it shows that after the shocks of the last three years, interest rates have reached a new normal.