The FTSE 100 and European stocks finished lower on Tuesday after the International Monetary Fund (IMF) said the UK economy will shrink and perform worse than other advanced economies, including Russia, in 2023.
Across the pond, Wall Street was higher as investors sort through a wave of corporate earnings ahead of Wednesday's crucial Federal Reserve interest rate decision.
In the latest update of its economic forecasts, the IMF said that it expected the UK's gross domestic product (GDP) to contract by 0.6% in 2023.
The UK is expected be the only country to shrink this year across all the advanced and emerging economies. Even sanctions-hit Russia is now forecast to grow this year.
The IMF said that while the broader global economy was doing better than expected, with inflation having peaked and investment beginning to turn around, the UK economy would face a downgrade "reflecting tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets".
Chancellor Jeremy Hunt said the UK outperformed many forecasts last year.
IMF Growth Projections: 2023
RSA🇿🇦: 1.2% https://t.co/4ifKc9qi4j #WEO pic.twitter.com/qELAmtqXLP
— IMF (@IMFNews) January 31, 2023
"It hangs in the balance whether the UK will narrowly stave off a recession or not. At the start of the year, prime minister Rishi Sunak pledged to halve inflation and grow the economy," Victoria Scholar, head of investment at Interactive Investor, said.
"While inflation is already showing signs of easing, the IMF’s forecast indicates the latter pledge may be more difficult to achieve."
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, added: “Ultimately, the UK has a productivity and demand problem, which when put together creates a very difficult environment.”
“There’s a chance the UK could muster a better performance than the IMF is predicting, given upgrades to expectations from other bodies in recent months.”
“The market will remain very sensitive to interest rate and inflation readings until we have a clear path out of the stagnation.”
Meanwhile, Brent crude (BZ=F) slipped and was trading at around $84 (£68.23) per barrel amid fears that initial demand recovery expectations regarding China were too optimistic.
In Asia, Tokyo’s Nikkei 225 (^N225) closed lower, retreating 0.39% to 27,327 points, while the Hang Seng (^HSI) in Hong Kong lost 1.12% to 21,822. The Shanghai Composite (000001.SS) also slipped, tumbling 0.42% to 3,255 points.
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