The International Monetary Fund slashed growth forecasts for the UK today despite predicting a faster than expected recovery for the global economy.
Its latest quarterly World Economic Outlook lowered UK growth estimates to 1.2 per cent for this year and 2.1 per cent in 2011, down from the 1.3 per cent and 2.5 per cent it predicted in April.
The IMF report prompted attacks from Shadow Chancellor Alistair Darling on the savage clampdown unveiled in June's emergency Budget, which aims to claw back an annual £113 billion in spending cuts and tax hikes by 2014/15 to tackle the deficit.
"This downgrade shows the huge risk the new Government is taking by deliberately choosing to take so much money out of the economy. At a time when growth in Europe is moribund it's increasingly clear that the Government is risking jobs and recovery," Mr Darling warned.
The IMF's latest report puts UK growth next year below the 2.3 per cent predicted by the Office for Budget Responsibility.
But the body also warns of the danger of cutting too fast. The IMF said: "Growth prospects in advanced economies could suffer if an overly severe or poorly planned fiscal consolidation stifles still-weak domestic demand," it added.
The Washington-based organisation raised its 2010 world growth forecast to 4.5 per cent from 4.1 per cent in April, helped by improved prospects for the US and fast-growing economies such as India and China.
Asian economies have recovered strongly this year, driven by buoyant exports and stronger domestic demand, the IMF said.
The agency raised its 2010 growth forecast for China to 10.5 per cent from 10 per cent in April, for Japan to 2.4 per cent from 1.9 per cent and for India to 9.4 per cent from 8.8 per cent. The estimate of the region's growth rose to 7.5 per cent from 7 per cent.
But it warned that any slackening in Europe's recovery "would affect Asia through both trade and financial channels".
Risks have "risen sharply" due to Europe's financial turbulence, with leaders needing to act quickly to resolve debt problems and restore confidence in their banks, it said.
Weak data from major economies in recent weeks have diminished confidence in a strong rebound from last year's recession.
The IMF said European leaders must act quickly to rebuild confidence - resolving uncertainty about banks' exposure to government debt, as well as making sure lenders have enough capital and markets have adequate liquidity.
It said many advanced economies urgently needed to push ahead with financial system reforms including recapitalising banks, restructuring and consolidating banking industries and overhauling regulation.
"In the absence of complete banking sector recapitalisation and restructuring, the flow of credit to the economy will continue to be impaired," the IMF said.Reuse content