Rishi Sunak has staked his premiership largely on his ability to fix Britain’s economy. The International Monetary Fund (IMF) has made clear this will be a tough job.
When delivering his Budget last month, Jeremy Hunt boasted that the UK was on course to avoid recession. But the IMF’s forecast that GDP will shrink by 0.3 per cent puts that claim in doubt, and confirms that Britain is struggling worse than peer countries.
It is a sharp corrective to recent suggestions that the economy is perking up: even without a technical recession, usually defined as two consecutive quarters of negative growth, there is no realistic prospect of significant growth this year.
Even more concerning, perhaps, is the IMF’s warning that inflation could prove more persistent than hoped – leading in turn to interest rates that are higher for longer.
Changes in GDP take time to feed through to people’s everyday lives; inflation and interest rates have an instant impact. A second consecutive year of falling living standards would be felt by almost everyone in the UK and cement the impression that the Conservatives are no longer in control of the economy.
When Mr Sunak promised to halve inflation this year, he was mocked for picking a target that appeared trivially easy, given the likelihood that price increases would slow down of their accord. Government insiders say the IMF’s warnings show that in fact nothing can be taken for granted – and insist they need to double down on their tight fiscal plans to bring inflation down to a reasonable level.
To some extent having the IMF sound the alarm is a short-term help for Mr Sunak and Mr Hunt, strengthening the arguments they are already making and quieting Conservative MPs who want a return to the Trussite agenda of tax cuts.
But for any government, let alone one run by a man whose chief claim to fame was protecting the economy during the pandemic, slumping GDP and high inflation are a toxic cocktail. The IMF’s assessment that much of this is driven by factors outside ministers’ control only makes matters worse by limiting the menu of possible responses. The Prime Minister and Chancellor have work still to do.