Britain will emerge from recession this year, the International Monetary Fund said on Tuesday, adding that the country’s economy was “underpinned by resilient demand amid lower energy prices”.
But the fund warned that unless interest rates remained high for longer, the UK risked falling into persistent inflation.
“Economic activity has slowed markedly from last year and inflation remains stubbornly elevated,” the fund said, adding that “growth prospects, while improving in recent months, remain subdued.”
The IMF predicted earlier this year that the UK economy would shrink by 0.5% between the last quarter of 2022 and the last quarter of this year.
But, in a major upgrade, it said the economy would now grow by 0.4% in 2023, reflecting stronger wage growth, more supportive fiscal policy and a faster easing of congestive pressures on global energy prices and supply chains.
It expects gross domestic product to grow by 1% in 2024 and an average of 2% in 2025 and 2026.
But the IMF warned that inflation would now remain above the Bank of England’s 2% target, six months longer than it forecast last month, until mid-2025.
“Further tightening of monetary policy may be required and interest rates may have to remain elevated for a longer period of time,” it said.
The fund warned against “premature celebrations” as high energy prices could be replaced by more persistent price and wage pressures, which could lead to a “stabilization” of inflation at a higher pace.