UK Will Not Avoid Recession Says IMF; What Does This Mean for the Pound?

Tumbling down the growth league table

It's been a fairly solid start to the year so far for sterling and the economic indicators haven’t been as bad as the negative headlines would suggest. In fact, the United Kingdom likely grew the fastest among the G7 in 2022 as the economy continued to recover from the deep pandemic slump of 2020. But it’s safe to say that the reopening boost has now well and truly faded, and Britain may now have a bigger inflation problem on its hands than other countries.

Brexit has made the price of certain goods costlier after the UK left the single market, however, the bigger impact has been on the labour market. Worker shortages have been evident after freedom of movement with the rest of the EU came to an end following Brexit, adding to wage pressures. The pandemic exacerbated this problem as many people left the workforce, mainly due to early retirement or being unable to work because of long-term health effects from Covid.

Consumers’ woes set to worsen in 2023

Add to that the possibility that it might take longer for inflation to come down substantially in the UK, 2023 could be an even worse year for UK consumers. The government, meanwhile, is also tightening its purse strings as it needs to reign in spending after borrowing ballooned during the pandemic. This is positive from the inflation perspective as it should help dampen price pressures, but there will be no extra cash to go around for tax cuts or other growth initiatives.

However, a potentially bigger concern for businesses as well as investors is the lack of a long-term economic strategy by the Conservative party. Rishi Sunak replacing Truss may have restored political calm and eased the market panic, but his premiership has so far been marred by endless strikes in the public sector and a series of Tory sleaze allegations.

Can new leadership fix Britain’s problems?

The IMF may therefore have a point in being so much more pessimistic about Britain’s growth prospects as the economy is facing multiple headwinds. Even if the severity of some of these challenges has been overdone and the UK fares better than anticipated this year, investors’ outlook is unlikely to change until there is a new government in Downing Street that has a clear vision for the country.

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At this point, the markets’ best bet of that might just be the Labour party. Under the current leader, Keir Starmer, the party has shifted closer towards Tony Blair’s New Labour and away from Jeremy Corbyn’s left-wing influences. Thus, a Labour government does not seem like such a big threat anymore and could provide better stability. However, the next general election is not expected until the end of 2024 and it could be difficult for the pound’s outlook to turn dramatically more bullish until then.