31 January 2023

Why the IMF sees Britain as the sick man of the global economy

The UK’s growth is forecast to fall behind every other major economy, including Russia.

Illustration by Otto Steininger/Ikon Images

The grim prognosis from the International Monetary Fund (IMF) this morning is that Britain, alone in the G7, will suffer economic contraction this year. Following stronger than expected growth last year, the British economy is now expected to shrink by 0.6 per cent in 2023, meaning it will perform worse than Russia. Like all economic forecasts, it’s unlikely that the IMF’s latest update will be perfectly accurate, but beyond the headline number it highlights structural problems that have become undeniable.

We depend on gas

The laissez-faire privatisation and deregulation of the UK’s energy market in the previous decade led to a country with very little energy storage, a dependence on gas and a profusion of small companies using risky strategies to profit amid fierce competition. While wholesale energy was cheap this allowed consumers to get cheap deals – but the moment global prices changed we found ourselves uninsured. At the press conference following the release of the IMF’s update its chief economist, Pierre-Olivier Gourinchas, said the first reason the UK’s outlook was so bad was that gas comprised a “larger share of energy, with a higher pass-through to final consumers” of its costs. Higher spending on energy means stretched household budgets and lower spending on other goods and services across the economy.

We pay too much for houses

Gourinchas also said that the UK’s “high share of adjustable-rate mortgages” makes the country more sensitive to interest rate rises. In the US, for example, it is normal for homeowners to fix their mortgage rate for 30 years. In the UK house prices have been pushed up by a market in which borrowers seek out cheap, short-term debt, often fixing their rate for just two years. The Bank of England has raised its base rate to the highest level since 2008, and is expected to raise it again on Thursday (2 February). The Office for National Statistics (ONS) estimates that 1.4 million households will refinance their mortgage at a significantly higher rate this year, which means millions of people will cut their spending.

Our labour market is in bad shape

The third reason Gourinchas identified for the UK’s low growth is that our labour market “has not reabsorbed as many people back into employment as it had before [the pandemic]”. This is a problem that economists at the Bank of England have highlighted for some time, and it is getting worse. In November the ONS reported that half a million workers had been removed from the labour force by historically high levels of long-term sickness. The defunding of social care and public health, and the subsequent overburdening of the NHS, have left the UK with the worst access to healthcare in Europe. Very large numbers of workers are now leaving the workforce permanently due to conditions such as chronic pain and mental illness. This puts further pressure on the labour market, which could make inflation harder to reduce and mean that still tighter monetary policy (ie higher interest rates) is needed.

Can’t we blame taxes?

The political right has concluded that if the IMF’s doomsaying is true, it must be the consequence of Jeremy Hunt’s “tax raid” (which is actually Rishi Sunak’s “tax raid”, reimposed after Kwasi Kwarteng’s brief but spectacular attempt to run the economy like a libertarian think-tank). In fact the IMF’s update mentions tax just once, when it suggests that “solidarity taxes” on the wealthy could be a useful measure for helping vulnerable people to cope with the cost of living, return to the workforce and grow the economy. That’s not to say that the UK doesn’t have a high tax burden, or a poorly organised tax system – wealth is taxed at a much lower rate than work, landlords pay a lot less than real employers and business growth and investment is often punished by the tax base – but the kind of wholesale, unfunded tax cuts that were attempted by Liz Truss would be even less funny a second time around.

Can’t we blame Brexit?

The IMF update doesn’t mention Brexit at all, because it’s a necessarily brief overview of the current leading factors affecting growth and inflation across the global economy. But by all means do blame Brexit, which has caused an 18 per cent drop in exports to the EU that has not, as promised, been replaced by trade to the rest of the world; the Office for Budget Responsibility reported last year that the “trade intensity” of our GDP had fallen relative to the rest of the G7, and that the UK had consequently “missed out on much of the recovery in global trade” that followed the lifting of pandemic lockdowns. Added impediments to business – from recruitment to sourcing materials to export paperwork – have dented business confidence, while major investments in new industries (such as huge new factories for electric car batteries) are heading elsewhere.