The minister dismissed IMF warnings that the UK economy is set for a sharp contraction

The UK is set to be the world’s worst performing major economy this year, according to the International Monetary Fund (IMF).

In its latest World Economic Outlook update, the IMF downgraded its UK GDP forecast, predicting a contraction of 0.6 percent. The new outlook for the year leaves the UK behind peers in the G7 group of countries and the only country across developed and emerging economies to suffer a year of GDP contraction expected by the IMF.

Among other G7 countries, the IMF’s 2023 GDP forecast shows growth of 1.4 percent in the United States, 0.1 percent in Germany, 0.7 percent in France, 0.6 percent in Italy, 1.8 percent in Japan and 1.5 percent in Canada. .

The IMF said that while the wider global economy is doing better than expected, inflation has peaked and investment is starting to turn around, the UK economy will face a downgrade “reflecting tighter fiscal and monetary policy and fiscal conditions and still-high retail energy prices. Household budgets Weighing in on”.

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The IMF’s forecast of a 0.6 percent contraction this year is a reassessment from October, when it said the UK could face 0.3 percent growth.

“Adverse risks have reduced since October [forecast]”, said the IMF. “On the upside, a strong boost from pent-up demand or a sharp decline in inflation is plausible in many economies. On the downside, severe health outcomes in China could hold back the recovery, Russia’s war in Ukraine could escalate, and tighter global financing conditions could worsen debt woes.”

Ask over Sky News Asked whether the government accepted the IMF’s new predictions this morning, Roads and Local Transport Minister Richard Holden suggested the forecast was probably “wrong”.

He said: “If you look at the IMF report, they also praised what the government has done in the last few months with Jeremy and Rishi coming in to help stabilize the situation. What we have seen over the last few months is that the UK has actually performed better than the IMF forecast for last year and the OECD forecast and the year before that. Since 2016, we have outperformed Germany, for example.

“I’m interested in the results”, added Mr Holden.

When it was put to the minister that the IMF had concluded that the UK economy was worse than Russia, Mr Holden said: “The proof will be in the pudding”.

Asked again if the IMF “got it wrong”, he continued: “I think so. The IMF has changed its mind on some of these issues before. And the statistics show that the IMF was wrong”.

Mr Holden also said the UK had overtaken Germany and Japan in the past few years.

Reacting to the IMF figures, Labour’s shadow chancellor Rachel Reeves MP said there were many signs Britain was “lagging behind our peers”.

Ms Reeves said: “The Government should be doing everything it can to strengthen our economy and keep it growing. It’s the only way we can move from crisis to crisis as we have been for so long.”

IMF Chief Economist Pierre-Olivier Gourinchas explains that three primary factors drive the UK’s economic outlook.

He said: “Firstly, there’s exposure to natural gas… We’ve seen energy prices rise very quickly in the UK. A large share of energy comes from natural gas with higher pass-through to final consumers.

“Employment levels in the UK have also not returned to pre-pandemic levels. It’s a situation where you have a very, very tight labor market but you have an economy that hasn’t reabsorbed as many people into employment as it used to. That means there is less production, less production.

“The third is that there is a very sharp fiscal tightening because inflation has been very high, a side effect of this high pass-through of energy prices.

“Inflation was 9.1 percent last year, and it’s actually expected to be much higher this coming year at 8.2 percent (so) the Bank of England has started to tighten.

“The UK has a fairly high share of adjustable rate mortgages. So when the Bank of England starts raising rates, it feeds into the mortgage rates they pay mortgage holders and it also slows down economic activity”.