UK growth will be held back this year by disruption caused by spread of the Omicron variant of coronavirus and the ongoing supply chain crisis, according to the International Monetary Fund (IMF).
In its latest World Economic Outlook update, the IMF has downgraded its UK growth forecast for 2022 to 4.7%, from the 5% predicted in October.
It also slashed the global growth outlook for 2022 to 4.4% from 4.9% as the twin threats have also hit economies across the world, while it warned that soaring inflation will last for longer than first predicted.
The IMF said: “The global economy is entering 2022 in a weaker position than anticipated.
“News of the Omicron variant led to increased mobility restrictions and financial market volatility at the end of 2021.
“Supply disruptions have continued to weigh on activity.
“Meanwhile, inflation has been higher and more broad-based than anticipated.”
The UK’s downgrade comes after a marked bounceback in 2021, with the IMF predicting gross domestic product (GDP) expanded by 7.2% last year, up from 7% in its October forecast.
This comes in spite of the Omicron impact in the final weeks of December, which has since decimated workforces and left sectors struggling with staff absences.
This has added to shortages of workers, goods and materials caused by supply chain difficulties that emerged in the summer.
But the IMF upgraded its UK 2023 prediction to 2.3% from 1.9% in its October report.
Adding to fears over a mounting cost-of-living crisis, the IMF said it now estimates inflation will not subside until 2023, averaging 3.9% in advanced economies worldwide and 5.9% in emerging market and developing economies in 2022.
“Elevated inflation is expected to persist for longer than envisioned in the October WEO (World Economic Outlook), with ongoing supply chain disruptions and high energy prices continuing in 2022,” the IMF said.
“Inflation should gradually decrease as supply-demand imbalances wane in 2022 and monetary policy in major economies responds,” it added.
Effective monetary policy communication is a key tool to avoid provoking overreactions from financial markets
With central banks globally starting to raise interest rates to counter high inflation, the Washington-based group warned of threats to financial stability.
It said there could be a “sudden repricing of risk in markets”, which may hit vulnerable sectors.
The Bank of England raised UK rates from 0.1% to 0.25% last month and is expected to increase them again in February to control surging inflation.
“Effective monetary policy communication is a key tool to avoid provoking overreactions from financial markets,” the IMF stressed.
The IMF urged central banks to clearly signal that rates could be eased again if the pandemic worsens.
It said international co-operation “will also be essential to minimise stress” as rates are raised from historical lows.
The IMF also flagged the need for “much larger co-ordinated global policies” for climate change to meet new goals laid out at the recent Cop26 conference in Glasgow.
“Investing in climate policies remains imperative to reduce the risk of catastrophic climate change,” it said.
