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While the IMF left its overall economic forecasts largely unchanged from January, it stressed signs of resilience alongside lower global energy and food prices masked a darker reality.
The UK economy will shrink by 0.3% this year, amid a hard landing for the... whole global economy if stubbornly elevated inflation keeps interest rates high, the International Monetary Fund has said in a downbeat report.
The IMF's gloomy forecast for the UK points to a belief Chancellor Jeremy Hunt's "Budget for growth" announced last month will not be enough to bring it up from the global economic doldrums.
While the IMF predicts the UK economy will shrink by 0.3% this year, this is still a marked improvement on the 0.6% contraction it had forecast in January.
Recession 'absolutely necessary' to get inflation under control
The IMF's forecasts for the UK, featured in its twice-yearly World Economic Outlook, is worse than Hunt expected, and has the UK missing his two main fiscal rules; to have both a falling public debt burden and borrowing below 3% of gross domestic product by 2028.
Among all other large advanced nations, only Germany was expected to shrink, with output in Europe's largest economy forecast to slip by 0.1% this year.
In a statement in response to the IMF's outlook, Chancellor Jeremy Hunt said: "Thanks to the steps we have taken, the OBR says the UK will avoid recession, and our IMF growth forecasts have been upgraded by more than any other G7 country.
"The IMF now say we are on the right track for economic growth. By sticking to the plan we will more than halve inflation this year, easing the pressure on everyone."
While the IMF left its overall economic forecasts largely unchanged from January, it stressed signs of resilience alongside lower global energy and food prices masked a darker reality.
Pierre-Olivier Gourinchas, the IMF's chief economist, said: "Below the surface . . . turbulence is building, and the situation is quite fragile".
"Inflation is much stickier than anticipated even a few months ago," he said. "More worrisome is that the sharp [monetary] policy tightening of the past 12 months is starting to have serious side effects for the financial sector."
Turmoil in the UK government bond market last autumn following then Prime Minister Liz Truss's disastrous "mini Budget", and last month's US banking turbulence showed the "significant vulnerabilities [that] exist both among banks and non-bank financial institutions", the IMF said.
Commenting on the IMF report, Luke Bartholomew, senior economist, abrdn, called it "grim reading", adding "we agree with the broad message of the forecasts that the UK economy is likely to endure recession-like conditions for much of this year".
However, Bartholomew said he believes the IMF is not pessimistic enough on US growth.
"We expect ongoing credit condition tightening to tip the US economy into recession later this year, with large spillovers to the rest of the world," he said.
UK marginally avoids technical recession as GDP data beats expectations
Looking beyond the near term, the IMF's analysis suggests the recent bout of inflation has not shaken the global economy out of a low interest rate equilibrium.
Instead, interest rates are pinned down by slow moving forces like demographics and inequality, which the IMF sees little reason to think have been fundamentally changed since the pandemic.
Bartholomew added: "If the IMF is right about this, and we are right about a recession, the debate will move to how much central banks are likely to cut interest rates in the coming years.
"Investors may find this period of high interest rates was simply a brief interruption of the low-rate world they have been dealing with since the global financial crisis."
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