British economy hammered by second downgrade in three months

british workforce foreign labour

Britain’s economic prospects have been downgraded by the International Monetary Fund (IMF) for the second time in three months as it warned the country had become dependent on foreign-born workers for growth.

The fund said that the UK is at risk of becoming trapped in a prolonged period of weak growth and stubborn inflation, as it warned of zero growth this year once increases in the population are taken into account.

IMF analysis showed growth in Britain’s workforce had been powered entirely by immigrant labour since 2019.

It came as official figures show that the number of workforce dropouts claiming long-term sickness had surged to a fresh record high.

More than 2.8m people now say they are too ill to work, the highest number since records were first collected by the Office for National Statistics (ONS).

The IMF on Tuesday downgraded its forecasts for UK growth for the next two years, even as it hailed a brighter global outlook.

Its World Economic Outlook showed the global economy is expected to expand at a faster-than-expected pace of 3.2pc this year.

However, the British economy is expected to expand by just 0.5pc in 2024 as “lagged negative effects of high energy prices wane”. This is slightly lower than the IMF’s predictions both in January and last October, and follows growth of just 0.1pc in 2023.

It is also the second weakest growth rate in the G7 after Germany. While the IMF predicted a rebound to 1.5pc in 2025, this was down from a forecast of 1.6pc made in January and 2pc last October.

Pierre-Olivier Gourinchas, the IMF’s chief economist, noted that the UK was similar to the eurozone, where activity was rebounding from “very low levels”.

The IMF added that real growth per head – which economists say is a better proxy for living standards because it accounts for changes in the population – was likely to stagnate in the UK this year, after shrinking in 2023.

It said Canada was the only economy in the G7 expected to shrink more in per-head terms this year.

The IMF said increases in the size of workforces in several advanced economies including the UK reflected “increased inflows of migrants”, with “faster growth in the foreign-born than in the domestic-born labor force”.

The Fund added that there had been a sustained rise in this trend in the UK since 2019.

The Office for Budget Responsibility, the Government’s tax and spending watchdog, believes net migration – the numbers entering the UK minus those leaving – will average 350,000 over the next five years.

The influx of migrants will help to drive up the total number of adults in the UK from 55m in 2023 to 57m by the end of the decade.

The IMF highlighted that the domestic workforce was smaller today than it was in 2019, compared with a roughly 20pc rise in the foreign-born workforce, even after the UK’s departure from the European Union.

A Treasury spokesman said the IMF report “shows we are winning the battle against high inflation” and said: “The forecast for growth in the medium term is optimistic, but like all our peers, the UK’s growth in the short term has been impacted by higher interest rates, with Germany, France and Italy all experiencing larger downgrades than the UK.

“With inflation falling, wages rising, and the economy turning a corner, we have been able to lower taxes for 29 million people, as part of our plan to reward work and grow the economy.”

The IMF has already urged rich countries like the UK to slash benefits to get more men back into work and improve childcare policies to encourage more women to find jobs.

“With real wages up again and millions benefiting from this month’s huge boost to the National Minimum Wage, it is work, not welfare, that delivers the best financial security for British households.”

Average regular earnings in the three months to February rose by 6pc on the year, official figures published on Tuesday showed. This represents a slowdown from the previous pace, but shows wages are growing more quickly than economists had anticipated.

After adjusting for price rises, pay packets are up 2pc in real terms, the ONS said, marking the fastest growth in earnings since September 2021.

However, the job and wage data published on Tuesday risks complicating the Bank of England’s plans to cut interest rates after pay growth proved stubbornly high.

Sustained pay growth suggests inflationary pressures from the jobs market are cooling more slowly than the Bank of England may wish. Officials led by Governor Andrew Bailey have raised interest rates in an effort to bring down the pace of price rises, particularly in the services sector, where wages are especially important.

Mr Gourinchas said there was greater uncertainty about the trajectory of inflation in Britain compared with other advanced economies. This raised the risk of inflation, which currently stands at 3.4pc in the UK, remaining higher for longer.

The IMF still expects the Bank of England to cut interest rates three times in 2024 from 5.25pc to 4.75pc, starting in the second half of the year.

It signalled that rate cuts in the UK and Europe may come faster than in the US, where Mr Gourinchas said unsustainable tax and spending policies overseen by US president Joe Biden warranted “particular concern”.

However, UK rates are expected to settle at a higher level than both the eurozone and US, at around 3.5pc by the start of 2026.

New ONS figures showed the number of people in work in the three months to February dropped below 33m for the first time since October 2022.

Unemployment, which covers those who do not have a job but are searching for one and are able to start quickly, rose back above 1.4m.

It takes the unemployment rate to 4.2pc, up from below 4pc three months earlier. There are still jobs available: the total number of vacancies on offer rose from 886,000 in February to 937,000, the ONS said.

This indicates a degree of stability after a long slide in the number of positions available since the pandemic peak of more than 1.3m.

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