IMF takes axe to UK growth forecasts and warns of global outlook risks

Lender sees just 0.2 per cent UK growth in 2012 and urges action from eurozone

The International Monetary Fund yesterday handed the UK a bigger growth forecast downgrade than any other advanced nation and warned the global economy remains in a "precarious" state.

The international lender of last resort said that the British economy will grow by just 0.2 per cent in 2012, down from the 0.8 per cent it was expecting in April. The 0.6 per cent downgrade is the largest experienced by any advanced economy in the IMF's regular World Economic Outlook.

Even the outlook for the two recession-hit eurozone nations, Spain and Italy, has not deteriorated so badly over the past three months, according to the IMF. Spain's outlook has been upgraded from a 1.8 per cent contraction to a 1.4 per cent fall. The forecast for Italy is unchanged at a 1.9 per cent decline.

The US economy is expected to grow by 2 per cent, down from 2.1 per cent seen in April. Germany is seen as growing by 1 per cent, rather than 0.4 per cent.

The IMF sees China growing by 8 per cent in 2012, down from 8.2 per cent.

For the global economy as a whole, the IMF, led by Christine Lagarde, sees growth of 3.5 per cent. Despite the host of downgrades, this is more or less the same as in April because growth in the first quarter of the year turned out stronger than expected.

However, the IMF warned that the global economy could easily turn out significantly weaker if policymakers in Europe failed to tackle the eurozone sovereign debt crisis and US politicians do not prevent automatic spending cuts kicking in next year. "Downside risks continue to loom large … reflecting risks of delayed or insufficient policy action," it said.

The substantial downgrade for the UK increases the pressure on George Osborne because the IMF argued last September that nations with low borrowing costs, including the UK, should slow their pace of fiscal consolidation if growth fell short.

But Carlo Cottarelli, the director of the IMF's fiscal affairs department, said yesterday that the UK should not change course on deficit reduction. "There is already a slowing down of the pace of the adjustment this year in the UK," he said. He added that looser monetary policy should first be given a chance to stimulate the economy. This month the Bank of England announced a further £50bn of quantitative easing and unveiled an £80bn scheme to push down the borrowing costs of banks. The IMF also said the Government's deficit reduction timetable is being thrown off course by weak growth. It says that the UK's deficit will fall to 8.1 per cent in 2012, rather than the 7.9 per cent it expected three months ago.

The Government's official watchdog, the Office for Budget Responsibility, in March predicted 0.8 per cent growth for the UK over 2012, followed by 2 per cent in 2013.

On the eurozone, the IMF said that the European Central Bank should reconsider the reactivation of its €210bn (£165bn) sovereign bond buying programme. It also said that eurozone nations should be allowed to run temporary larger deficits in response to recession. The 17-member eurozone economy is expected by the IMF to contract by 0.3 per cent this year, before expanding by 0.7 per cent next year.

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