Yahoo Finance IMF forecasts more pain for the UK: prices will remain higher for longer
The International Monetary Fund (IMF) warned on Tuesday that high inflation will persist longer in the UK than in similar economies, thanks to chancellor Kwasi Kwarteng’s unfunded tax cuts.
Inflation in the UK will be the highest in the G7 at the end of 2023, while in the 19-member eurozone, only Slovakia is projected to have a higher rate.
It comes as Kwarteng is set to travel to Washington this week for the IMF annual meetings amid increased scrutiny that his recent policies will force the Bank of England (BoE) to hike interest rates further, making borrowing more expensive for households and businesses.
The Bank of England’s interest rate is currently 2.25% and is expected to be raised further at the next meeting of decision makers in November.
This is set to take its toll next year as consumers cut back on spending and businesses slow down investments, resulting in slower growth, the IMF said.
Read more: UK economy set to suffer deeper recession next year as interest rates rise faster
The financial agency also said that Britain’s economic growth could improve in the short term, but sharply reduce next year, as consumer spending catches up with soaring prices and higher interest rates.
The UK is projected to grow at a rate of 3.6% in 2022, a 0.4% upgrade from the IMF’s previous forecast in July. This is down from 7.4% in 2021.
Growth is then expected to decline to 0.3% in 2023, with the IMF downgrading its forecast by 0.2% from a previous 0.5% estimate.
The IMF said its forecast was prepared before the UK government unveiled its mini-budget on 23 September, and that it would have lifted its estimate for the 2023 growth rate “somewhat” if it had known about it earlier.
It added that there have been investor concerns about the UK’s fiscal and inflation outlook since the debt-financed tax cuts were announced, which has also led to a sharp fall in the value of the pound (GBPUSD=X).
Threadneedle Street was forced to intervene in bond markets for a third time in two weeks on Tuesday, as traders were spooked.
“Central banks are trying to tighten monetary policy, and if you have at the same time fiscal authorities that try to stimulate aggregate demand, it’s like having a car with two people in the front ... each trying to steer the car in a different direction. That’s not going to work very well,” Pierre-Olivier Gourinchas, IMF chief economist, told a press conference in Washington on Tuesday.
Read more: Bank of England doubles bond-buying programme to £10bn a day
The fund also cautioned on a potential house price crash as rising interest rates makes getting on or moving up the property ladder more unaffordable.
It said housing markets were now at a “tipping point” after climbing more than 20% during the pandemic, and warned that the biggest risks were in China and other emerging markets.
In the worst case scenario, house prices could fall by a quarter in real terms over the next three years in emerging markets, while in advanced economies it could be as much as 10%.
“Risks to housing markets are growing because of rising mortgage rates and tightening lending standards, with many more potential borrowers now being squeezed out of markets. Stretched housing valuations could adjust sharply in some market segments,” the IMF said.
"Affordability pressures and deteriorating economic prospects are key drivers of downside risk to house prices across most regions."
Watch: Will UK house prices ever fall?
Meanwhile, its latest World Economic Outlook (WEO) report also showed that the slowdown of the global economy has intensified since April as it faces “stubbornly” high inflation.
Globally, the forecast for growth remains unchanged at 3.2% for 2022, however, the IMF cut its guidance for the year ahead to 2.7% from a previous 2.9% projection.
Germany and Italy will see weaker growth than the UK among the world’s advanced economies, with the IMF forecasting decline for both countries in 2023. Russia’s economy is expected to contract by 2.3% next year, the biggest fall of all the nations included in the projections.
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“As storm clouds gather, policymakers need to keep a steady hand. Increasing price pressures remain the most immediate threat to current and future prosperity by squeezing real incomes and undermining macroeconomic stability,” Gourinchas said.
The IMF also warned that the energy crisis in Europe was not transitory, with the situation worsening in a year’s time.
“Winter 2022 will be challenging, but winter 2023 will likely be worse. Price signals will be essential to curb energy demand and stimulate supply.
Price controls, untargeted subsidies, or export bans are fiscally costly and lead to excess demand, undersupply, misallocation, and rationing. They rarely work. Fiscal policy should instead aim to protect the most vulnerable through targeted and temporary transfers.
