Thursday 29 October 2020 4:59 pm

IMF: UK economy to shrink more than 10 per cent amid second wave

The International Monetary Fund (IMF) slashed its growth forecasts for the UK economy today, and urged the government to keep spending record amounts to support a recovery.

UK GDP will shrink by 10.4 per cent in 2020, the Fund said. The new figure was a considerable from the prediction of a 9.6 per cent fall made just weeks ago.

A 10.4 per cent contraction would be worse than anything seen in 300 years. By comparison, GDP dropped 4.2 per cent in 2009 amid the financial crisis.

Britain “now faces headwinds from a second Covid-19 wave, Brexit-related uncertainty, rising unemployment, and stress on corporate balance sheets,” the IMF said.

The international lender of last resort also said the rebound next year will be weaker than initially expected. It will come in at 5.7 per cent rather than 5.9 per cent, it predicted.

It said there would be “reduced capital accumulation”, “persistent unemployment”, and “lower productivity growth”.

The Fund said this would “hold GDP three to six per cent below its pre-pandemic trend through the medium-term”.

The overriding message of the IMF’s look into the UK economy was that the government should do all it can to support growth.

“Fiscal policy should continue to accommodate the costs of programs now in place to protect workers and firms,” it said.

UK could ‘spend more’ to support economy

The Fund praised the UK’s massive fiscal stimulus programme and the Bank of England’s unprecedented actions. It said this was “one of the best examples of coordinated action globally”.

Yet the IMF said the UK should prepare itself for “a meaningful additional push”.

The Fund, which lends to countries in trouble, also praised the UK’s current plans to increase investment spending.

But it added: “There is a case to spend more, if project effectiveness can be preserved at higher scale.”

Chancellor Rishi Sunak said the report showed that the UK “is on the right economic course” to tackle the pandemic.

The IMF said the huge boom in public spending should be dealt with later on in a “gradual” fashion. 

“Fiscal consolidation, to stabilise and reverse the rise in public debt ratios, should start once the private sector begins to durably lead the recovery,” it said.

Sunak focused on this line, saying it showed the importance of keeping the public debt down.

“Over time, and in line with other major economies, we must get our public finances back on a sustainable path,” he said.

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