The UK economy remains on course to suffer the sharpest contraction among the world’s advanced economies this year, the International Monetary Fund said on Tuesday, but the UK now looks set for a shallower economic hit in 2023 than previously thought.

The IMF gave the UK an upgrade in its World Economic Outlook forecasts but it still expects the UK to suffer the largest contraction of any Group of 20 economy, followed by a small 1% rebound in GDP next year.

UK gross domestic product (GDP) will contract by 0.3% in 2023, the IMF said in its latest set of global forecasts — but that is a smaller shrinkage than the 0.6% contraction the Fund predicted in January.

The UK is no longer the only Group of Seven economy set for a fall in GDP this year, with Germany’s economy now expected to shrink by 0.1%, the IMF said.

The IMF forecast the UK’s inflation will average 6.8% in 2023, down from 9.1% in 2022 — but that is still the highest among G7 countries and well above the UK central bank’s 2% target.

“This year’s economic slowdown is concentrated in advanced economies, especially the euro area and the United Kingdom,” said Pierre-Olivier Gourinchas, the IMF’s Chief Economist.

The IMF said the UK is one of the countries where high inflation is leaving household budgets “stretched.”

Gourinchas said: “The world economy is still recovering from the unprecedented upheavals of the last three years, and the recent banking turmoil has increased uncertainties.

“We expect global output growth to fall from 3.4% last year to 2.8% in 2023, before rising to 3% in 2024, mostly unchanged from our January projections.

“Advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% in 2023.

“Global headline inflation is set to fall from 8.7% in 2022 to 7% in 2023 on the back of lower commodity prices but underlying core inflation is proving to be stickier. Importantly, this outlook assumes that recent financial stresses remain contained.”