IMF warns high inflation will last longer in UK than in similar economies

The IMF warns high inflation will last longer in the UK than in most other advanced economies, the IMF warned as it aimed for Kwasi Kwarteng’s unreimbursed tax cuts.

Inflation in the UK will also be the highest in the G7 by the end of 2023, while in the 19-member eurozone, only Slovakia will have higher inflation by the end of 2023, the fund predicted on Tuesday, setting the It is due to the prime minister.

Kwartengwho is expected to travel to Washington this week for the annual meetings of the IMF, facing accusations that his tax policies will force the Bank of England to raise interest rates to offset pressure. inflationary.

Rather than spur growth, the IMF has made it clear that it thinks government policies have a serious risk of leading to a deeper recession once inflation remains too high for too long.

Bar chart CPI Inflation Forecast - December 2023 (%) shows the UK projected to have the most persistently high inflation in the G7

In its biennial World Economic Outlook, the fund said Kwarteng’s fiscal package came too late to include in its forecasts, but it had “complicated the fight against inflation”.

Its forecast in the UK shows growth slowing from 7.4% in 2021, to 3.6% in 2022 and just 0.3% in 2023. The IMF said it would raise its estimate of the pace. growth in 2023 “somewhat” if it knew about the “Small” Budget earlier, but that would also increase inflation.

The Fund predicts UK inflation will remain as high as 6.3% by the end of 2023, more than every member of the eurozone except Slovakia.

Bar chart CPI Inflation Forecast - December 2023 (%) shows Only Slovakia among euro zone countries is forecast to have higher persistent inflation

But when it released the report, the IMF praised the British government for seeing the flaws in its approach and taking action to correct the situation.

Pierre-Olivier Gourinchas, the IMF’s chief economist, told the Financial Times that since the “small” Budget received a contraction in both the IMF and financial markets, “the good news is that the UK government has taken action. sending all the right signals about their Budget being calculated under OBR. . . so that all of this is on track.”

But that doesn’t make it easy for government, he added. “The markets are looking at this inflated debt level, they see interest rates rising, they’re thinking, ‘well, it’s going to be harder to sustain the rising debt levels. [and] Gourinchas said.

Countries should not follow the UK’s example, he added. “Doing otherwise would only prolong the fight to reduce inflation, risk lowering inflation expectations, increasing funding costs and adding to financial instability, complicating the mandate of fiscal authorities as well as as currency and finance, as recent events illustrate”.

The criticism marks a continuation of the IMF’s public downplay of Prime Minister Liz Truss’ economic strategy. Following the financial statement at the end of last month, the IMF issued very unusual statementsaid it was “closely monitoring recent economic developments in the UK” and that it was “not recommending large and untargeted financial packages”.

The IMF’s comments came as the organization released global forecasts highlighting the risk of the world economy falling into a recession, with global growth forecast for next year to be the lowest since 2001. beyond the year of the global financial crisis and the Covid-19 crisis.

It said there are a range of challenges facing the global economy, from China’s zero-Covid policy, the need to raise interest rates to combat inflation and the war in Ukraine that has pushed up food and energy prices. quantity is high.


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