THE UK looks set to avoid recession this year, according to the latest update from the International Monetary Fund. 

Instead, the IMF predicts the British economy will grow by 0.4 per cent this year.

That marks a significant improvement on the start of the year when the Washington-based body said they expected output to contract by 0.6%.

The upward revision also means the UK will no longer be the slowest major economy in the world in 2023.

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In their update, the IMF said the change reflected declining energy costs and “higher-than-expected resilience” in both demand and supply. 

The fund’s economists made no change to the growth forecast for 2024, which they said would “rise gradually to 1%” with disinflation softening the hit to incomes. 

Although, the IMF did warn that inflation would be unlikely to fall to the Bank of England’s 2% per cent target until the middle of 2025, six months later than it forecast in April.

That could mean “further monetary tightening" with interest rates needing to "remain high for longer to bring down inflation more assuredly."

The Bank of England increased the base interest rate to 4.5% earlier this month – the 12th rise in a row.

The fund said there was a risk that the price of goods and services and wage growth would keep inflation uncomfortably high this year. 

The report also commented on the UK’s need for immigration to help fill vacancies and skills gaps. 

It comes ahead of the publication of the latest figures around migration and a growing political row.

According to the IMF, the UK should look at “fine-tuning the immigration system to alleviate sectoral and skilled labour shortages and enhance labour market flexibility”.

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The IMF also pointed positively to the UK and the EU finally reaching a deal on the Northern Ireland Protocol, while also noting the “more measured approach for retained EU laws” as something that will benefit business.

In the report, the IMF said a UK return to the EU’s €100 billion Horizon programme would boost small and medium-sized firms’ access to finance and research and design support.

Jeremy Hunt, the chancellor, said the IMF forecast was a “big upgrade” for the UK’s growth prospects, and “credits our action to restore stability and tame inflation”.

He added: “It praises our childcare reforms, the Windsor framework and business investment incentives. If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy — but the job is not done yet.”