The UK economy is set to stage a modest recovery next year thanks to falling inflation, new forecasts from the International Monetary Fund (IMF) suggest, but growth will remain sluggish this year.
In its latest World Economic Outlook, the Washington-based body said it expected the UK economy to grow 0.5 per cent this year before picking up to 1.5 per cent in 2025, both 0.1 percentage point downgrades on its January round of forecasts.
The projections suggest the UK economy is unlikely to generate much momentum this year and will lag all G7 economies apart from Germany.
Next year, however, the UK will be the fastest-growing major economy in Europe.
This would come after a weak performance in 2023 when the UK economy grew just 0.1 per cent due to the influence of stubborn inflation and high interest rates. The IMF noted the improvement in 2024 would come as “the lagged negative effects of high energy prices wane”.
Looking into next year, it said continued disinflation would allow “financial conditions to ease and real incomes to recover”.
Source: IMF
Inflation has fallen sharply from its peak of over 11 per cent, and the Bank of England is expected to start cutting interest rates later this year, which should support a recovery.
According to the IMF, inflation will average 2.5 per cent over 2024 before dropping to the two per cent target in 2025.
“The forecast for growth in the medium term is optimistic, but like all our peers, the UK’s growth in the short term has been impacted by higher interest rates,” a Treasury spokesperson said.
Looking at the global inflationary backdrop, the IMF said the immediate priority for central banks it to “ensure that inflation touches down smoothly, by neither easing policies prematurely, nor delaying too long and causing target undershoots”.
Despite the influence of high interest rates and inflation, the global economy has outperformed expectations over the past couple of years.
Further progress, however, looks like it will be difficult to engineer. The IMF thinks the world will grow by 3.2 per cent this year, which is in line with its estimate for last year, although inflation will continue to fall.
“Most indicators continue to point to a soft landing,”Pierre-Olivier Gourinchas, the IMF’s director of research, said.
“Despite many gloomy predictions, the world avoided a recession, the banking system proved largely resilient, and major emerging market economies did not suffer sudden stops,” he said.
Gourinchas said that given the precarity of the global economy, policymakers should prioritise enhancing economic resilience.
“The first such priority is to rebuild fiscal buffers…Unfortunately, fiscal plans so far are insufficient and could be derailed further given the record number of elections this year,” he warned.