Britain’s households will endure a second year without an improvement in their living standards in 2024 as the effects of high inflation take time to abate, the International Monetary Fund has revealed.
In its flagship World Economic Outlook (WEO), the Washington-based IMF said it was forecasting modest 0.5% UK growth this year – but only as a result of a rising population.
Growth per head – one of the key measures of living standards – is expected to remain flat this year after a 0.3% drop in 2023.
The IMF said there would be a pick-up in the economy as 2024 wore on – something the government is banking on to reduce its opinion poll deficit with Labour – but it would not be until 2025 that the cost of living crisis would be over.
Although official figures due out on Wednesday are expected to show a fall in the UK’s annual inflation rate to about 3%, the IMF believes the Bank of England will be cautious about cutting interest rates, and has pencilled in only two 0.25 percentage point cuts in official borrowing costs this year.
The tightness of the UK’s labour market – dating back to before the arrival of Covid – might explain why inflation had been higher than in the US or eurozone after the onset of the pandemic, it said. “Growth in the UK is projected to rise from an estimated 0.1% in 2023 to 0.5% in 2024, as the lagged negative effects of high energy prices wane, then to 1.5% in 2025, as disinflation allows financial conditions to ease and real incomes to recover.”
Overall, the WEO found a marked divergence between the faster-growing US and the sluggish performance of the UK and other European economies.
While the US is expected to grow by 2.7% in 2024, the eurozone is predicted to expand by 0.8%. Germany is on course to be the slowest growing member of the G7 group of big developed nations, with the IMF projecting growth of 0.2%. France and Italy are expected to grow by 0.7%, Japan by 0.9% and Canada by 1.2%.
As in the UK, the IMF says growth will be weaker across much of the G7 once population changes are taken into account. US per capita growth is projected to be 2.1%, Germany 0.1%, France 0.5%, Italy 0.8%, Japan 1.3% and Canada -1.1%.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, said the US overperformance relative to other rich countries might not last, since it was in part due to unsustainable tax and spending policies by the federal government.
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“The exceptional recent performance of the United States is certainly impressive and a major driver of global growth, but it reflects strong demand factors as well, including a fiscal stance that is out of line with long-term fiscal sustainability,” he said.
“This raises short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy since it risks pushing up global funding costs. Something will have to give.”
Gourinchas said growth in the eurozone would pick up from “very low levels” during 2024, while China was being held back by the downturn in its property sector.
World output is expected to grow by 3.2% in both 2024 and 2025 – unchanged on 2023. “The global economy remains remarkably resilient, with growth holding steady as inflation returns to target,” Gourinchas said.
The half-yearly WEO was completed before last weekend’s attacks on Israel by Iran, but the report stressed a broader Middle East conflict was one of the downside risks to its forecasts. “The conflict in Gaza and Israel could escalate further into the wider region. Continued attacks in the Red Sea and the ongoing war in Ukraine risk generating additional supply shocks adverse to the global recovery, with spikes in food, energy, and transportation costs,” it said.
The UK chancellor, Jeremy Hunt, said: “The IMF’s figures today show that the UK economy is turning a corner. Inflation in 2024 is predicted to be 1.2% lower than before, and over the next six years we are projected to grow faster than large European economies such as Germany or France – both of which have had significantly larger downgrades to short-term growth than the UK.”
