The UK’s hopes of a v-shaped recovery will face serious headwinds from a second wave of coronavirus, and Brexit and the economy will not return to pre-pandemic levels in 2021, the IMF has reported.
Experts at the body said the initial sharp economic rebound was also being hurt by rising unemployment and stress on corporate balance sheets.
“We are at a time of high uncertainty. We are not projecting a return to pre-crisis levels in 2021,” said Kristalina Georgieva, the IMF’s managing director.
“We are very keen to advise everyone to be agile and flexible in policy response as the pandemic continues.”
The IMF now projects the UK economy will contract by 10.4% in 2020 and only grow by 5.7% next year, worse than previous expectations.
In June it projected a 10.2% contraction this year and 6.3% growth in 2021.
Unemployment
It said that persistent unemployment and lower productivity growth will keep gross domestic product (GDP) around 3% to 6% below its pre-pandemic trend for the medium term.
The IMF praised the UK “authorities’ aggressive policy response — one of the best examples of co-ordinated action globally”, but warned that policy support will need to continue to see the economy through Covid-19 and help it transition after Brexit.
The report found there is a case to spend more money to fuel the recovery, if the effectiveness of projects can be maintained.
The UK was already dealing with pre-existing economic challenges like regional inequality, transitioning to a post-Brexit regime, poor productivity growth and an ageing population before the pandemic.
Ms Georgieva said the IMF’s expectations include a presumption that the UK and EU will reach a deal.
Chancellor Rishi Sunak said: “We have a responsibility to ensure the next generation inherits a strong economy backed by strong public finances.
“Let’s be clear on what the fund are saying today: it’s right to support the economy in the short term but over time, and in line with other major economies, we must get our public finances back on a sustainable path.”