Britain has been given the biggest economic upgrade of any G7 country after forecasters at the International Monetary Fund were forced to concede they had been too gloomy.
Stronger than expected economic performance so far this year means UK GDP is on track to contract by 0.3pc across 2023, half the 0.6pc fall the fund (IMF) forecast in January, according to its latest World Economic Outlook.
Britain is still expected to have the weakest performance of any large economy. It had the best growth in the G7 last year and rivals are making up the gap.
Meanwhile, the IMF warned that successive interest rate rises, deteriorating financial conditions and the ongoing war in Ukraine mean the world is entering a “perilous phase” with a 15pc chance that global growth will come almost to a halt.
The UK's upgrade was one of the largest in the world, behind only Spain and Russia at 0.4 percentage points, and Saudi Arabia, where the GDP forecast was upgraded by 0.5 points.
It was also the most positive in the G7. Germany was downgraded from 0.1pc growth to a 0.1pc contraction, while Japan's growth projection was cut by 0.5 points to 1.3pc.
Italy is expected to grow by 0.7pc, up from a previous forecast of 0.6pc; the US has been upgraded from 1.4pc to 1.6pc; and Canada and France were unchanged at 1.5pc and 0.7pc respectively.
The IMF has historically been one of the most gloomy forecasters for the UK. Even with the recent upgrades, its expectations are still below predictions from the Office for Budget Responsibility and the Organisation for Cooperation and Economic Development’s, which have both forecast a 0.2pc contraction.
The longer term outlook in the UK is also improving. The IMF revised up its 2024 forecast for UK GDP by 0.1 points to 1pc. In France and Germany, by contrast, it downgraded its 2024 forecasts by 0.3 points.
However, the UK will still see a larger drop in growth this year than any other country. Even Russia will record 0.7pc growth in 2023, the IMF forecast.
The IMF also warned of a looming risk of a global financial crisis. Economic counsellor Pierre-Olivier Gourinchas warned of “significant vulnerabilities” in both banks and non-bank financial institutions, illustrated by the UK gilt crisis last autumn and the collapse of several regional banks in the United States.
He said: “The financial system may well be tested again. Once again, downside risks dominate. Nervous investors often look for the next weakest link, as they did with Credit Suisse.”
Global inflation is proving stickier than expected even a few months ago. The IMF revised up its inflation estimates for the last six months, following stronger than expected demand. This may push central banks to raise interest rates even higher, or keep them high for longer.
In turn, this will bring more pressure on global financial systems. The sharp tightening of monetary policy over the past 12 months is starting to have serious side effects for the financial sector.
Mr Gourinchas warned of the possibility of a “‘risk-off’ shock”, in which a sharp tightening of global financial conditions could hammer credit conditions and public finances, triggering large outflows of capital and a slump in activity. This could bring global growth down to just 1pc.
He said: “We are therefore entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner.”
Even if this severe scenario can be evaded, global economic growth over the next five years will slump to its lowest level since 1990.
The IMF expects global GDP growth will fall from 3.4pc in 2022 to 2.8pc in 2023, with a 3pc five-year forecast.
Advanced economies will see the biggest slowdown, with growth slumping to 1.3pc this year, less than half the rate recorded in 2022.