The International Monetary Fund (IMF) cut its growth forecasts for the UK economy for both 2010 and 2011 yesterday, despite reporting improvements in the global outlook.
Britain's economy will grow by just 1.2 per cent this year and 2.1 per cent next, according to the IMF's latest World Economic Outlook report, rather than the 1.3 per cent and 2.5 per cent estimated in April. Although the IMF makes no direct link, the downgrades are widely understood to result from spending cuts outlined in the Chancellor's emergency Budget last month.
Vicky Redwood, an economist at Capital Economics, said: "This year's forecast has been affected by the additional fiscal tightening. Next year's is pulled down by the combination of the extra fiscal effect and the weaker prospects for the eurozone, which is our major export market."
In contrast to its gloomy prediction for Britain, the IMF revised upwards its estimates of global economic growth for this year – by 0.4 percentage points to 4.6 per cent – although next year's 4.3 per cent forecast was unchanged.
This year's higher global growth estimate came after forecasts for some countries were upgraded. China's was raised by 0.5 percentage points to 10.5 per cent and India's by 0.6 percentage points to 9.4 per cent.
But the Asian "tigers" are not the only strong performers. America is also outstripping expectations, the IMF said, with the US growth forecast for this year raised from 3.1 per cent to 3.3 per cent, and for next year from 2.6 per cent to 2.9 per cent.
Despite the rosier overall outlook, the IMF strengthened its warnings of the risks facing the global recovery, which is threatened on one side by the vast national debts from last year's fiscal stimulus measures, and on the other by governments trying too hastily to rebalance their books .
"While we predict the recovery will continue, it is clear that downside risks have risen sharply," said the IMF chief economist, Olivier Blanchard, as he launched the latest World Economic Outlook and its accompanying Financial Stability Report in Hong Kong. He said the annual figures glossed over a change in the tempo of recovery between the first half of 2010 and the second. Although the developed economies achieved 3 per cent growth between January and June, he said growth in the second half would slow to 2 per cent as private demand steadied.
Growth in the eurozone is expected to remain at 1 per cent throughout 2010, in line with the IMF's predictions in April. But growth next year is now expected to be 1.3 per cent rather than earlier forecast of 1.5 per cent. The IMF also downgraded its 2011 growth forecasts for Germany, France, Italy and Spain, as well as for the UK.
Although the IMF warned that cutting public spending too quickly could nip any economic recovery in the bud, it voiced support for fiscal tightening measures. Massive government debts were a threat to financial stability, the IMF said, because worried banks would continue to rein in lending, restricting the availability of interbank credit and undermining the recovery.
"While we remain cautiously optimistic about the pace of recovery, there are clearly dangers ahead," Mr Blanchard said.
"How Europe deals with fiscal and financial problems, how advanced countries proceed with fiscal consolidation, and how emerging markets rebalance their economies, will determine the outcome."