IMF slashes UK growth forecast but backs plans to cut deficit

The IMF has pushed Britain lower down the international growth league, slashing its estimates for growth and ramping its forecast for inflation – but also supporting the Coalition Government's "front-loaded" plans to reduce the budget deficit.

Conceding that the British downgrade is at least partly due to an unprecedented fiscal squeeze, the fund stated that this "necessary front-loaded fiscal consolidation dampens domestic demand". Additionally, the fund urged the Bank of England not to embark on any further loosening of monetary policy, which it regarded as "unnecessary, given current prospects for activity and developments". In practice, the next likely move in rates is upwards.

The British economy will grow by 1.75 per cent this year, the IMF now says, down from the 2 per cent projected in January, while prices will rise by 4.2 per cent – well over double the official inflation target, and a radically higher estimate than the last published figure for 2011 of 2.5 per cent. The IMF maintained its growth forecast for the UK for 2012 at 2. 3 per cent.

Fresh UK inflation numbers are released today, and are expected to rise further towards 5 per cent from February's 4.4 per cent. The IMF, meanwhile, expects UK unemployment will rise to 7.8 per cent of the workforce this year, about 100,000 more than the current headline figure of 2.5 million. That number is expected to climb higher when the official figures are published tomorrow. These may well also see youth unemployment breach the politically sensitive one million barrier.

Launching the fund's World Economic Outlook (WEO), the IMF's chief economist, Olivier Blanchard, implied that the Chancellor George Osborne was operating a sort of "Goldilocks" approach, with Mr Blanchard praising "smart fiscal consolidation that is neither too fast, which could kill growth, nor too slow, which would kill credibility".

The WEO concludes: "Securing public debt sustainability remains a priority for most European economies. Current fiscal consolidation plans are broadly appropriate and rightfully differentiated in the near term. In 2011, the largest economies in the region (France, Germany, Spain, UK) will implement differing measures (in size and composition) to reduce their deficits".

The fund joins the Organisation for Economic Co-operation and Development and other international bodies in broadly endorsing the Government's strategy, and offers little ammunition for the shadow Chancellor, Ed Balls, who has taken recent signs of faltering growth as evidence that the policies are "hurting but not working". Much now hangs on the UK's growth figures for the first quarter of this year, on 27 April.

More broadly, unemployment is emerging as a common challenge for all countries. "Overall, growth is insufficiently strong to make a major dent in high unemployment rates. Some 205 million people are still looking for jobs, which is up by about 30 million worldwide since 2007, according to the International Labour Organisation. The increase in unemployment has been very severe in advanced economies; in emerging and developing economies, high youth unemployment is a particular concern," the IMF said.

The "unbalanced" global recovery is simply summarised, said Mr Blanchard: the world economy will expand by 4.5 per cent per year in 2011 and 2012, but by only 2.5 per cent in the West and Japan, against 6.5 per cent in emerging and developing states.

In that context, the fund warned again that the "global imbalances" – principally America's yawning trade deficit with China – are not being reduced fast enough. Meanwhile, Portugal, Greece, Ireland and other distressed eurozone members would take "many years" to return to normal.