Economic growth in the UK will be little to write home about in 2024, according to new forecasts from the International Monetary Fund (IMF), but policymakers should be wary of stubborn services inflation.
In its latest World Economic Outlook, the global fiscal watchdog forecast that the UK would grow 0.7 per cent in 2024, unchanged on its last projection in May.
This would put the UK in line with Japan and Italy and ahead of Germany, which is only expected to grow 0.2 per cent due to continued weakness in manufacturing.
France is expected to grow 0.9 per cent while the US will power ahead of other advanced economies, notching annual growth of 2.6 per cent.
Looking forward, the IMF expects the UK economy to grow 1.5 per cent next year, unchanged on its previous round of forecasts.
The IMF’s forecasts for this year will seem fairly pessimistic given the UK’s surprisingly strong performance so far in 2024.
The economy grew 0.7 per cent in the first quarter, making it the fastest growing economy in the G7. After surprisingly strong growth in May, many economists think that the UK could come close to matching that performance in the second quarter.
Over the last few days, a number of forecasters have been upgrading the UK, with Barclays and Goldman Sachs both suggesting the UK could grow 1.1 per cent in 2024.
Although the IMF’s global growth forecasts are largely unchanged, the body sounded the alarm on the persistence of services inflation in advanced economies.
“Services price inflation is holding up progress on disinflation, which is complicating monetary policy normalisation,” the IMF said. “Upside risks to inflation have thus increased”.
The forecasts noted that strong wage growth could also make it more difficult for inflation to come back under control when profit margins are already squeezed, particularly if productivity growth remains weak.
In a blog accompanying the forecasts, Pierre-Olivier Gourinchas, chief economist at the IMF, warned that “rising services prices and wages may keep overall inflation higher than desired.”
“Even absent further shocks, this is a significant risk to the soft-landing scenario,” he added.
Traders expect that stubborn services inflation will mean central banks can only move gradually on cutting interest rates.