IMF Cuts Growth Forecast for U.K. Economy

IMF Cuts Growth Forecast For UK Economy


George Osborne is dealt a blow less than 24 hours after his conference speech, as the IMF cuts its forecast for UK growth.


8:12am UK, Tuesday 09 October 2012



Video: The IMF expects the UK economy to shrink
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David Cameron tells Sky's Sunrise that the coalition is sticking to "Plan A+" despite a warning from the IMF.

Video: Cameron Insists Economy Is Healing
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  By Ed Conway, Economics Editor
  
  The International Monetary Fund has slashed its growth forecast for the UK - predicting that the economy will shrink by 0.4% this year.
  
  The latest estimate is a downgrade of the IMF's figures from six months ago - when growth of 0.2% was predicted for the year.
  
  The IMF also cut its forecast for economic growth next year from 1.4% to 1.1%.
  
  The combined cut in both years' economic forecast is greater than any other country in the developed world.
  
  The downgrade, which follows a similar shift from the Organisation for Economic Co-operation and Development last month, comes only hours after Chancellor George Osborne pledged at his party conference to persevere with his austerity plans.
  
  In its World Economic Outlook, the fund cut its forecast for economic growth in the world's advanced economies from 2% this year to 1.5%.
  
  But it was Britain that faced greater cuts in the IMF forecast than any of its major fellow economies, including Spain, Italy and other troubled euro economies.
  
  The IMF also revealed that this year, for the first time in the crisis, Britain will have a bigger budget deficit than Greece, as the economic collapse undermines the public finances.
  
  It predicted Britain's overall budget deficit this year would be 8.2% of GDP - higher than Greece's 7.5% of GDP.
  
  But while some are likely to point towards the IMF report as a signal that the Government should abandon its austerity policies, it signals continued approval for the coalition plan.
  
  It said instead that the Bank of England should be left to try to stimulate the economy.
  
  The report, which was published overnight at the IMF's annual meeting in Japan, said: "In the United Kingdom, further monetary easing through unconventional measures may be necessary, depending on the effects of the easing measures implemented recently.
  
  "With the prospect of somewhat weaker global growth, automatic stabilisers should be allowed to operate fully, and economies with limited fiscal vulnerability should stand ready to implement fiscal contingency measures if large downside risks materialise."
  The latest figures will make sobering reading for Chancellor George Osborne
  The Chancellor will travel to Tokyo for the IMF meeting later this week. In his conference speech on Monday he said: "It tells you something about just how big it was that the deficit is still higher today than when a British government went begging to the IMF in the 1970s.
  
  "This Wednesday I'm also going to a meeting of the IMF. Don't worry: because of the resolve of the British people, I go representing a country that is seen as part of the solution, not part of the problem. That is only because of the credibility our plans have earned."
  
  Although Britain's economy is currently in recession, and is expected to shrink this year, the Office for National Statistics is likely later this month to reveal that it expanded in the third quarter of the year, ending the technical recession.
  
  However, the Bank of England Governor Sir Mervyn King has warned the economy could well slip back into negative territory, calling this "the zig-zag recovery".
  
  Labour's shadow chancellor Ed Balls said: "Coming just hours after George Osborne complacently insisted he would cling on to his failing plan, these downgraded IMF forecasts are another damaging blow to the Government's economic credibility.
  
  "Twelve months ago the IMF forecast growth of 1.6% in 2012 and said a plan B would be needed if growth were to be lower than expected.
  
  "A year on, with Britain in a double-dip recession, borrowing rising as a result and growth forecast to be minus 0.4%, there can be no question that a change of course is urgently needed."