IMF says UK no longer heading for recession but urges against tax cuts

theguardian.com:

The International Monetary Fund has upgraded its forecasts for UK growth saying the country will no longer fall into recession this year, but warned the government not to cut taxes as that would fuel inflation and result in high interest rates for longer.

In a message to the chancellor, Jeremy Hunt, that he should maintain his planned squeeze on public spending, the Washington-based body said tax policy should stay “aligned with monetary policy in the fight against inflation”.

Any financial surpluses should be used to pay down government debt to “rebuild fiscal buffers”, it said in its annual Article IV review of the UK’s economic outlook released on Tuesday.

In a more upbeat assessment of the UK’s growth this year, the IMF forecast the country’s gross domestic product would grow by 0.4% this year, tearing up its estimate in February of a 0.3% contraction.

The economy is still expected to grow at the same modest pace of 1% in 2024, before rising to 2% in 2025 and 2026.

IMF officials upgraded the UK forecast in response to the greater “resilience” of UK households and businesses during the worst of the inflation shock last year. They noted that company bankruptcies had begin to increase, but said the overall picture was of an economy making a steady recovery.

Inflation is expected to fall back to 5% by the end of the year and below 2% by the summer of 2024, mainly in response to falling energy prices, the report said.

However, it said the Bank of England should focus on the potential for wages growth to remain high and the rising price of business services. The central bank should wait for these elements to fall before considering loosening its monetary policy.

The report said an examination of historical inflation shocks