IMF demands interest rate rises as UK set for weakest growth among G7 economies next year

The world’s lender of last resort has appealed for central banks to raise interest rates and for governments to take a responsible stance with public finances while warning of a harder impact from the global inflation shock.

The International Monetary Fund (IMF) used its updated World Economic Outlook to take another red pen to growth forecasts as economies battle the impact of rising prices.

It said that growth was “stalling” in the world’s three largest economies (the US, China and eurozone) as a consequence of the deteriorating picture for inflation, linked to the COVID pandemic and latterly Russia’s war in Ukraine, forecasting that the problem would remain more stubborn than predicted in its previous update.

Chillingly it warned that under a “plausible” scenario, downside risks for the global economy including a complete shutdown in Russian gas supplies to Europe and prolonged zero-COVID lockdowns in China would result in one of the worst performances for output since 1970 if realised.

The fund’s new forecasts saw global growth of 3.2% for 2022 – a downwards revision of 0.4% on April’s forecast.

Much of that figure was accounted for by a massive 1.4% downgrade for the United States – the world’s largest economy.

The IMF said it now expected growth of just 2.3% this year as a result of an inflation rate that, like in the UK, was at a 40-year high.

It said that disruption to trade flows with China was another big factor behind the downgrade and warned growth would stall further, to just 1%, in 2023.

The report downgraded its expectations for Chinese growth this year by 1.1% to just 3.3% as it also faces inflationary pressures but also battles COVID outbreaks through shutdowns of major cities that have inflicted huge damage on its manufacturing sector.

The UK, the IMF projected, would see a growth of 3.2% this year – above those of its biggest competitors including France and Germany – but it repeated its forecast that output would ease significantly to just 0.5% in 2023 to become the slowest among the G7.

Russia was tipped to see its economy contract by 6% this year and by 3.5% in 2023 as it grapples with the effects of Western sanctions.

The sanctions imposed over the war in Ukraine have exacerbated the global inflation problem as it has forced countries to scramble for alternative supplies of key commodities including wheat, sunflower oil, oil and natural gas.

The IMF urged central bank and government action to help bring down inflationary pressures, with its fiscal prescription favouring the stance taken by former chancellor Rishi Sunak as he battles Liz Truss for the Tory leadership and keys to Number 10.

“With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers”, the fund said.

“Tighter monetary policy will inevitably have real economic costs, but the delay will only exacerbate them.

“Targeted fiscal support can help cushion the impact on the most vulnerable, but with government budgets stretched by the pandemic and the need for a disinflationary overall macroeconomic policy stance, such policies will need to be offset by increased taxes or lower government spending.”

The Conservative leadership race has been dominated by the candidates’ approach to the cost of living crisis.

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Ms Truss, the foreign secretary, favours a “bold” tax cut agenda to prevent the economy from going into reverse while the former occupant of Number 11 has ruled out giveaways in the short term for fear of fuelling inflation further.

The Bank of England, for its part, has raised the Bank rate at each meeting since December last year but is under pressure to opt for a sharper hike at its meeting early next month.

Governor Andrew Bailey has said that a 50 basis points increase, which would take its core rate to 1.75%, is on the table but not necessarily on the cards.

Pierre-Olivier Gourinchas, the fund’s chief economist, wrote: “Tighter monetary policy will inevitably have real economic costs, but delaying it will only exacerbate the hardship.

“Central banks that have started tightening should stay the course until inflation is tamed.”