UK economy approaches soft landing post recession – IMF
The UK economy is nearing a soft landing, with growth recovering faster than anticipated following a mild technical recession in 2023, according to the International Monetary Fund’s (IMF) Executive Board’s recent Article IV consultation.
The IMF report reveals a mixed economic outlook for the country, highlighting that inflation has dropped significantly, nearing the target due to the reversal of the energy price shock and the effects of tight monetary policy.
Modest growth of 0.7 per cent is projected for 2024, strengthening to 1.5 per cent in 2025 as real incomes rise, monetary policy eases, and financial conditions become more favourable.
Despite tight fiscal policy aimed at medium-term debt stabilisation, recent budgets have included tax cuts to boost investment and labour supply. Inflation is expected to temporarily rise to 2.5 per cent by the end of 2024 before stabilising at 2 per cent in early 2025.
However, long-term growth prospects remain subdued due to weak labour productivity growth, an ageing population, and higher than expected inactivity levels due to long-term illness, partially offset by increased migration.
Public services, particularly health, face significant pressures amid ongoing industrial action over pay, posing additional challenges.
While post-Brexit uncertainty has eased with progress on Irish border arrangements and resilience in UK service exports, UK firms continue to adapt to the new trading arrangements with the EU.
The IMF notes balanced risks to growth and inflation, with potential for both higher and lower outcomes depending on factors such as consumer spending, energy prices, and wage pressures.
The medium-term growth outlook could be adversely affected by disappointing productivity and labour supply, though ambitious structural reforms and AI adoption present potential upside risks.
Attribution: The International Monetary Fund (IMF).
