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In 2022, the UK economy will expand 3.2%, the second fastest in the Group of Seven advanced economies after Canada, the IMF said. Image Credit: Bloomberg

Britain will have the slowest growth among major industrialised nations next year as double-digit inflation and rising interest rates squeeze household spending, the International Monetary Fund said.

In its latest forecast, the fund downgraded the outlook for global growth and warned that the world economy was so fragile it may tip into outright recession. For now, it stopped short of predicting contractions for the leading economies.

The UK was downgraded sharply for both 2022 and 2023, reflecting an increase in the forecast for peak inflation from 7.8 per cent to 10.5 per cent at the end of this year, the institution’s World Economic Outlook update showed.

In 2022, the UK will expand 3.2 per cent - the second fastest in the Group of Seven advanced economies after Canada. In 2023, Britain drops to the bottom of the pack with just 0.5 per cent growth.

The IMF’s warning will feed the bitter leadership race to succeed Boris Johnson as prime minister in which the economy has emerged as the central battleground.

Foreign Secretary Liz Truss has accused her rival, former Chancellor of the Exchequer Rishi Sunak, of driving the economy into recession with tax rises. He has faulted her for planning to stoke inflation, which is already at a 40 year high of 9.4 per cent, with promises to cut taxes.

Inflation is eating into household incomes, causing misery and the worst cost of living crisis in decades. The IMF said sub-inflation pay rises “are eroding household purchasing power” and causing slower growth.

Bloomberg Economics estimates that Truss’ tax cuts would add 0.6 per cent to 2023 GDP, which would lift the UK’s growth rate above France, Germany, Italy and the US on the IMF forecasts. The tax cuts would also add 0.4 percentage points to inflation and mean interest rates rise an extra half a percentage point. Markets expect UK rates to reach 3 per cent.

IMF also downgraded its 2023 forecasts for Germany, Italy, Canada and the US by more than it moved the outlook for the UK.

The biggest risks to growth globally are inflation and rates, the IMF said. An escalation in the war in Ukraine that causes energy and food costs to soar further, a cut-off of Russian gas supplies, tight labour markets that enable workers to extract higher pay settlements, and higher interest rates could tip countries into contraction.

The IMF has said previously that the UK faces a particularly severe inflation problem, with both the high energy prices Europe is experiencing and the job shortages seen in the US. In the WEO update, it warned that countries with tight labor could see “workers increasingly demand compensation for past increases in the cost of living”, raising the risk of a wage price spiral next year.

“The exact amount of policy tightening required to lower inflation without inducing a recession is difficult to ascertain,” the IMF said.