May 23 (UPI) -- Britain's economy is set to avoid recession this year due to demand buoyed by falling energy prices and the resilience of its financial system in the face of the global banking crisis, the IMF said on Tuesday as it closed out a country visit.
Economic activity has slowed significantly from last year and inflation remains stubbornly high following the severe terms-of-trade shock due to Russia's war in Ukraine and some "scarring" of the labor supply from the pandemic, the IMF said in a news release.
It forecast growth will slow to 0.4% in 2023 pulled down by tighter monetary and fiscal policies needed to curb inflation and lingering effects of the terms-of-trade shock, climbing to 1% in 2024, as disinflation softens the hit to real incomes and 2% in 2025 and 2026, as monetary and financial conditions ease. The deficit is seen falling to 3% of GDP by fiscal year 2027-2028.
Declining energy prices and increasing slack in the economy are expected to substantially reduce the annual inflation rate from its current 10.1% to around 5% by the end of 2023 and below the 2% target by mid-2025.
The IMF praised growth-positive measures in the Spring Budget including an increase in childcare support and a new capital investment allowance as well as reduced uncertainty due to the Windsor Framework in Northern Ireland agreement and a more measured approach for retained EU laws.
However, it warned of "considerable" upside risks to economic growth up ahead from greater-than-anticipated price and wage growth, leading to higher inflation for longer.
As recently as last month the IMF was forecasting Britain's economy would contract by 0.3% this year. The predictions are roughly in line with forecasts earlier this month used by the Bank of England monetary policy committee to justify raising interest rates for the 12th time in a row.
Chancellor Jeremy Hunt welcomed the independent assessment of the economy from the IMF saying it showed Britain was "on the right track," but that the job was not yet done.
"Despite the positive news, I know that high inflation and energy prices -- issues shared internationally -- remain key challenges," Hunt said.
Stressing that growing the economy was one of the government's top priorities, he said he was pleased to see that the IMF agree with the need for ambitious structural reforms to support growth because "that is exactly what we are delivering" with breakthroughs such as the Windsor Framework, net zero legal frameworks and strengthening the banking system.
But opposition Labor's shadow chief secretary to the Treasury Pat McFadden said the communique spelled out "the fragility of the U.K. economy, highlighting the slowdown in economic activity since last year and stubbornly high prices."
