Downgraded: IMF cuts UK growth forecast to the lowest in G7

ECONOMY
IMF cuts UK growth forecast to the lowest in G7

What happened?
Yesterday the International Monetary Fund downgraded its growth expectations for the UK to 0.5% in 2023 from 1.2% originally forecast in April. It means the UK is forecast to have the weakest growth of the seven richest economies in the world which include Canada, France, Germany, Italy, Japan and the US.

How did we get here?
The IMF - an international body that acts as a lender for countries facing financial difficulties - regularly updates its estimates of how it thinks countries are performing and flags any concerns it has on global growth.

Since its last update it’s trimmed forecasts not only for the UK but for the rest of the world. Global economic growth this year is cut from 3.6% to 3.2%, mainly driven by stalling growth in the world's three biggest economies - the US, China and the Eurozone.

The IMF blamed soaring and persistent inflation, first caused by the pandemic and more recently from Russia's war in Ukraine. 

The economic body says that the world is on the brink of a recession only two years after the last one.

The UK is set to fare worse than its G7 peers as inflation is running higher than in the rest of Europe and the US, taking more of a toll on household incomes. 

Timing is everything
The IMF’s latest economic outlook comes in the middle of the fiery race between Liz Truss and Rishi Sunak to become the next prime minister. Both sides have differing view on how to kickstart the economy. 

Truss believes that tax rises brought in by Sunak while he was chancellor risk driving the UK, already forecast to have weak growth, into recession. Whereas for Sunak IMF worries about inflation will strengthen his argument that Truss’ plans to lower taxes will just make matters worse. 

As Sunak and Truss continue to argue over inflation, interest rates, borrowing and debt, the IMF noticeably failed to offer a clear solution. “The exact amount of policy tightening required to lower inflation without inducing a recession is difficult to ascertain,” it said.

In other words, good luck sorting this out prime minister. 

ENERGY
EU agrees to winter gas ration amid Russia fallout

Yesterday EU energy ministers agreed to reduce gas usage by 15% this winter to avoid shortages as supplies from Russia look increasingly more uncertain.

Since Russia invaded Ukraine in February and the West retaliated by imposing economic sanctions, 12 EU countries have faced halts to, or reductions in, their Russian gas deliveries.

The EU believes that Russia is using its energy exports as a weapon to hit back at the West for the punishments it’s had to endure.

Yesterday’s decision to cut back on winter gas use came after the Russian state-run energy company Gazprom said that it’s choking the flow of natural gas to Germany starting today to 20% of its typical capacity. That’s giving major anxiety to European leaders who are already concerned about an energy crunch come the winter.

Although the EU has agreed to ban oil and coal from Russia starting later this year, the bloc has stopped short of doing the same for Russian natural gas because it relies heavily on imported gas, it’s estimated that in 2021 45% of EU gas came from Russia.

But given the geopolitical turmoil Europe is trying to wean itself off Russian gas and it’s made strides already.

Pre-invasion, Germany relied on Russia for about 55% of its natural gas needs. Germany has since slashed its reliance down to 30%.

Yesterday gas prices – already more than four times higher than they were a year ago – spiked even further to hit their highest in five months.