IMF forecasts UK recession, the only advanced economy set to contract in 2023

On a recent episode of the Invezz podcast, I pondered with a market strategist about the conundrum we are in at the moment. Namely, is a recession coming?

The IMF waded into the debate Tuesday. It forecasted that the UK would be the only “advanced economy” to enter into a recession in 2022. It forecasted a contraction of 0.6%, which is 0.9% below its previous estimate of 0.3% growth. 

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That’s…not great. Even Russia comes in better off, with a forecasted 0.3% contraction. 

I’ve covered the UK economy extensively over the last year, with all the twists and tales befitting of a Netflix drama series and possibly even a follow on book (not naming names). Perhaps none bigger than the brief, but ever-so-damaging, reign of Prime Minister Liz Truss. 

It now appears increasingly unlikely that the post-Brexit UK will escape this mess without some sort of recession, something the IMF are in agreement with. At least on the positive side, the IMF bumped its forecast for the British economy’s 2024 growth from an expansion of 0.6% to 0.9%. 

There was further positivity on a global scale, with the IMF bumping its global outlook for the first time in a year, up to 2.9%, a 20 bps increase from its previous report last October. 

Interest rates and inflation

Higher interest rates in response to crippling inflation have been the reason that the global economy has slowed. Gone are the days of the relentless bull market, and now the piper is here to be paid. 

The IMF forecasts global inflation would fall to 6.6% in 2023, and 4.3% in 2024. This would still place it well above pandemic levels, however. The softening inflation numbers over the past couple of months have been the primary driver behind a surge in markets, with the S&P 500 on the verge of banking its best January since 2019, up 6% on the year. 

For the UK specifically, the nation’s heightened exposure to natural gas is causing trouble in addition to the cocktail of tightening monetary policy and high inflation seen globally. Employment in the UK still remains below pre-pandemic levels, too, a concern given the labour market is extremely tight, ultimately leading to lower production and less growth. 

What next?

Of course, these are just forecasts. Look no further than the eurozone printing surprise growth in Q4 of 2022, beating analysts’ expectations of a contraction when announced earlier today. 

Nonetheless, times are sombre in the euro bloc, and only more so in the UK. 

Eyes will now turn to central banks in what is a pivotal week for markets. The UK announces its latest policy Thursday, the same day as the eurozone and a day after the US, with the Federal Reserve announcing its plans this afternoon. With seemingly everything going wrong – inflation, employment, energy reliance, a weak pound, softening housing market and whatever else you can think of – the road ahead is a difficult one. 

The next step, for now, is seeing what the Bank of England announces Thursday. Markets expect a 0.5 percentage point increase in the central bank’s base rate to 4%. This would be the tenth straight rate increase from the Bank’s monetary policy committee (MPC) since December 2021.

With the rate hike largely expected, it will be the language coming out of the committee that will draw the most eyeballs. Whatever is said, however, the road ahead looks tough for the UK in 2023.