LONDON (CNBC) — The International Monetary Fund downgraded its outlook for the UK economy even as it turns more optimistic on global growth.
Its new 2023 forecast evening also sees the UK as the only “advanced economy” to contract, by 0.6%. This is 0.9 percentage points lower than its previous estimate.
It is also worse than its outlook for Russia, where it forecasts a 0.3% decline.
IMF Head of Research Pierre-Olivier Gourinchas said there were three main reasons: The UK’s high exposure to natural gas, with higher market prices being passed on to consumers; employment remaining below its pre-pandemic level despite a very tight labor market, resulting in less production; and sharp monetary tightening.
However, the group did revise its 2024 outlook for the UK upward, from an expansion of 0.6% to 0.9%.
The IMF forecasts 1.4% growth in the U.S. in 2023, 0.7% growth in the euro area, 1.8% growth in Japan and 1.5% growth in Canada.
Meanwhile, it hiked its outlook for the global economy by 0.2 percentage points from its last report in October, to 2.9%.
That is still weak by historical standards, but factors including China’s Covid-19 reopening, a robust labor market and household consumption in the U.S. and better-than-expected adaptation to the energy crisis in Europe have brightened the picture, the IMF says.
But it said that in the UK as well as other European countries, persistently high inflation and tighter fiscal and monetary policies would weigh on household budgets.
Preliminary figures out Tuesday indicated the euro zone avoided a contraction in the fourth quarter of 2022, eking out 0.1% growth versus 0.3% growth in the third quarter, though some still believe the bloc will enter a recession.
UK GDP is estimated to have fallen 0.3% in the third quarter, and fourth quarter results due Feb. 10 are widely expected to show another decline.
Pessimistic projections for the UK from teams at Goldman Sachs and KPMG have also flagged the squeeze on disposable income as a key concern, as well as a potential deterioration of the labor market this year.
The UK faces challenges including high long-term sickness rates and a reduction in trade due to Brexit.