Britain faces 'double dip' slump, warns IMF

Britain's banks may need a further injection of capital from the Government, according to the latest review of the economy by the International Monetary Fund.

The IMF warned yesterday: "Significant uncertainties remain about the adverse impact of the recession on banks' asset quality. Substantial further write-downs would result in an erosion of capital buffers and might lead to renewed doubts about the capital adequacy of individual banks".

Ministers "should be prepared to provide further public capital, if needed", it added. The IMF also warned that the recovery was likely to be "slow and subdued... it is possible to get a 'double dip' growth path, with stronger rebound in mid-2009, followed by some weakness later in the year. Underlying vulnerabilities in the UK are sizeable".

According to the IMF, the economy will contract by 4.2 per cent this year, recovering to a mere 0.2 per cent expansion next year – markedly more pessimistic than the forecasts produced by the Chancellor, Alistair Darling.

Ajai Chopra, the chief of the IMF's mission to the UK, also urged the Treasury to restore the public finances, saying: "This benefit of the doubt will not last forever, and it's going to be important that the Government does not test the limits of the markets' confidence." The IMF says the nation's fiscal credibility "would be enhanced by specifying concrete expenditure and revenue measures".

George Osborne, the Shadow Chancellor, said: "Gordon Brown's dishonesty on spending now leaves him isolated abroad as well as at home. The IMF could hardly have delivered a more damning verdict on the Brown years."

Even so, the IMF praised ministers' "forceful and wide ranging" response to the credit crunch, saying: "These aggressive policies have successfully contained the crisis, and there are tentative signs confidence is returning."