UK Recovering Faster Than Expected After Slipping Into Technical Recession: IMF

With growth recovering faster than expected, the UK economy is approaching a soft landing, following a mild technical recession in 2023, said the International Monetary Fund (IMF).

The UK is going to polls this July, with Prime Minister Rishi Sunak seeking another term in office.

The UK economy is approaching a soft landing, with a recovery in growth expected in 2024, strengthening in 2025, IMF said.

Soft landing in economic parlance is managing inflation at comfortable levels without hurting economic growth.

Growth was 0.6 per cent on a quarter-to-quarter basis in the first quarter of 2024, marking a stronger-than-expected exit from the technical recession in the second half of 2023, which left full-year growth at 0.1 per cent, IMF said after an official staff visit to the UK.

Real GDP growth is now forecast at 0.7 per cent in 2024 (a slight upgrade from 0.5 per cent in April), before rising to 1.5 per cent in 2025.

The UK economy fell into a technical recession in the second half of 2023. A technical recession is often defined as two consecutive quarters of negative growth in the real GDP.

The fall in GDP in the fourth quarter, at 0.3 per cent, was the biggest since the first three months of 2021 when Britain imposed new COVID-19 restrictions.

“Consumer inflation has fallen faster than was envisaged last year and is projected to return durably to target in early 2025,” IMF said after the official staff visit to the UK.
Headline and core inflation stood at 3.2 per cent and 4.2 per cent year-on-year, respectively, in March, having declined rapidly due to stronger energy and imported goods price deflation, and the impact of restrictive monetary policy.

“Some upward pressure on inflation is expected in the second half of the year as base effects from lower energy prices wane, but a durable return to the Bank of England’s (BoE’s) 2 percent target is forecast by early 2025.”

The banking system in the UK remains healthy, but continued vigilance of all banks is warranted, IMF noted.

“Maintaining progress on initiatives to better assess and mitigate risks stemming from non-bank financial institutions (NBFIs) is important,” it suggested.

It also suggested structural reforms to boost economic potential and living standards are urgently needed, with a focus on easing planning restrictions, addressing skills shortages, and improving health outcomes.

“The UK should also stay the course on climate policies to realize the UK’s ambitious emission reduction targets.”

On what is the next phase of monetary policy, IMF Managing Director Kristalina Georgieva, said the next phase is to ease.

“When and by how much will be decided by the Monetary Policy Committee’s data-dependent, meeting-by-meeting approach. We think that rate cuts in the order of 50 to 75 basis points in 2024 would be appropriate,” Georgieva said.

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