UK to have slowest growth in the G7

Date : 28 July 2022

In its latest World Economic Outlook report, IMF has downgraded its global GDP growth projection for 2022 by 0.4% to 3.2% - if correct, this would be the lowest growth for over a decade. The projection for 2023 has also been reduced by 0.7% to 2.9%, the weakest for two decades.

Inflation weighs heavily on global growth

Global economic output fell in Q2 2022, for the first time since the outbreak of COVID-19 in 2020, primarily due to contractions in Russia and China.

The world economy has been weakened due to the cumulative effect of shocks including: global inflation, tightening monetary policy, a worsening slowdown in China due to COVID-19 outbreaks and the impact of the conflict in Ukraine.

Global inflationary pressure has been revised upwards from the April update. Globally inflation is now anticipated to reach 6.3% in developed economies, an upward revision of 1.5%.

All members of the G7* group, except Italy, have again had their growth forecasts for 2022 cut, including a 1.4% downward revision in the United States to only 1%. Advanced economies are now expected to see growth of only 2.5% and 1.4% over 2022 and 2023 respectively.

IMF is clear that bringing inflation back to target levels should be the first priority for policy makers in order to stop the squeeze in living standards. Tightening monetary policy now, by raising interest rates, will have painful economic implications in the short term, but these will be less than the consequences of not controlling inflation.

There exist a number of variables that could negatively impact global economic growth further including:

  • The risk of a stop or fall in Russian gas exports to Europe would have severe economic implications in Europe, especially Germany.
  • Tighter than expected labour markets could lead to higher and more persistent inflation across developed markets.
  • The risk of continuing COVID-19 outbreaks in China could further dampen Chinese growth.

UK economic weakness

Focussing in on the UK, the IMF paint a gloomy picture for the UK economy. GDP growth for 2022 has been further revised down 0.5% to 3.2%.

Concerningly, it is becoming clear that slow growth will be a persistent problem. The IMF has predicted that economic output will only increase by 0.5% over 2023. This is the lowest level of all countries in the G7. It should be noted that this forecast is more positive than the Bank of England’s predictions of -0.25% for 2023.

Inflation is weighing heavily on growth. UK inflation is now expected to reach 10.5% in 2022, this is an upward revision of 2.7%. The current inflationary pressure is a global event; however, the UK is seeing the highest levels of inflation compared to Europe and the US.

One of key determinants of future growth prospects and inflation levels will be the base interest rate set by the Bank of England. Last week, the Governor of the Bank indicated that the Monetary Policy Committee (MPC) were fully committed to bringing inflation back to the target of 2%. It was suggested that the MPC may vote to bring in a 0.5% percentage rise to interest rates in August. This would be the largest rise since 1995.

* The G7 group of nations comprises Canada, France, Germany, Italy, Japan, the UK and the USA

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