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IMF anticipates recession in Germany and Italy next year and an almost halt for the UK economy

Wednesday, October 12th 2022 - 09:26 UTC
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In an update to its World Economic Outlook, IMF said the German economy was expected to shrink 0.3% in 2023. It previously forecast 0.8% growth In an update to its World Economic Outlook, IMF said the German economy was expected to shrink 0.3% in 2023. It previously forecast 0.8% growth

The International Monetary Fund (IMF) on Tuesday predicted that Germany and Italy would both fall into recession next year, while Great Britain the G7 best performing economy this year, will come to an almost halt in 2023, following on the announcement of the mini budget by the Liz Truss government.

In an update to its World Economic Outlook, the IMF said the German economy was now expected to shrink by 0.3% in 2023. The IMF had previously forecast 0.8% growth for the country.

Germany — Europe's largest economy — is heavily dependent on Russian gas, which Moscow has cut in suspected retaliation for Western sanctions because of the invasion of Ukraine.

Italy, which is also reliant on Russian fuel imports, is set to see its Gross Domestic Product (GDP) contract by 0.2% — down sharply on the July forecast of 0.8% growth.

Although the Euro-zone is expected to avoid a recession, the output of the 19 countries in the single-currency bloc is forecast to grow by just 0.5%, worse than previously predicted.

“Weak 2023 growth across Europe reflects spillover effects from the war in Ukraine, with especially sharp downward revisions for economies most exposed to the Russian gas supply cuts,” the IMF said.

The report also mentioned “tighter financial conditions” for the Euro-zone, with the cost of borrowing having risen by 50 basis points in July and 75 points last month.

The global economy is now expected to grow by 2.7%, 0.2-percentage-points lower than previously expected. IMF Managing Director Kristalina Georgieva highlighted slowing economies in all three of the world's major economic zones.

While increased energy prices were the major problem for the Euro-zone, outbreaks of the COIVID-19 pandemic in China have become a persistent cause of supply chain problems. China's growth is forecast to accelerate to 4.4% next year, meager by Chinese standards and 0.2% down on July's outlook.

Although the United States' labor market remains strong, job growth appears to be slowing in response to the US Federal Reserve’s aggressive interest rate increases. The IMF slashed its outlook for growth in the United States from 2.3% to 1.6% this year. It expects only tepid growth of 1% in 2023.

As to the UK, IMF doubled criticism of chancellor Kwasi Kwarteng tax cuts, which would boost growth in the short term, but “complicate the fight” against soaring prices. IMF expects high prices to last longer in the UK with only Slovakia out of the Euro-zone set to see higher inflation.

Inflation, which measures how the cost of living changes over time, is expected to peak at about 11.3% before the end of the year in the UK, according to the IMF's latest assessment, and in each of the next two years, it expects price rises will average at about 9% - far above the Bank of England's target of 2%.

After Mr Kwarteng unveiled plans for huge tax cuts in the UK, the IMF criticized the plans warning they were likely to increase inequality and add to pressures pushing up prices.

In an unusually outspoken statement, the IMF said the mini-budget aimed to boost growth, and tax cuts could speed up the pace of price rises, which the UK's central bank, the Bank of England, is trying to bring down.

Downing Street defended the chancellor's plans, with the Prime Minister's official spokesperson saying its policies aimed “to support British people at a time of global high prices” and said the IMF report showed “the global challenges that countries are facing”.

The IMF warned the global economy was facing a downturn with “the worst yet to come” as war in Ukraine helps push prices higher around the globe. “For many people 2023 will feel like a recession,” it warned.

Categories: Economy, International.

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