IMF tells Britain to keep tight rein on public spending

The International Monetary Fund warned the British government yesterday to keep a close eye on spending. In its annual economic outlook, which happened to coincide with Gordon Brown's Budget speech, the Washington-based lender cut its forecasts for growth in the UK.

It also said the Bank of England had room to cut interest rates if the economy or housing market softened further. "While fiscal stimulus since 2000 has been helpful to support growth, vigilance is needed to safeguard the efficiency of spending," the IMF said in its World Economic Outlook report.

The IMF is expecting the British economy to grow 2.0 per cent this year and 2.5 per cent in 2004. That forecast is close to the Chancellor's Budget prediction yesterday of 2.0 to 2.5 per cent growth this year.

Consumer spending is likely to slow this year, but this should be offset by strength in other areas. Public sector demand should remain strong and there should be a modest recovery in net exports, the IMF said.

Meanwhile the IMF slashed its forecast for global growth by a full half a percentage point to 3.2 per cent this year, as a result of uncertainties over the Iraq war, poor domestic demand and an alarmingly feeble performance by the eurozone economy, especially Germany.

The IMF painted a sombre picture of the developed world's economy, trapped by weak stock markets, rising fiscal deficits and – in the case of Germany and Japan – strains in the financial sector. "For the past three months, concerns over conflict in the Middle East have weighed heavily on the global economy," Kenneth Rogoff, the IMF's chief economist, said. "But in our view, it is not just the war. A number of other risks weigh on the outlook."

The lone bright spots are Asia and the so-called "transition countries" of Eastern Europe and in Russia, where 2003 growth may hit 4 per cent. The scaled back figures are all the more striking in that the IMF is considered if anything too optimistic in its predictions.

Once again the United States is expected to lead the recovery. But its economy is projected to grow by only 2.2 per cent, compared with the 2.6 per cent expected by the IMF in its last set of forecasts in September 2002.

In Japan, mired in recession and deflation, expansion is likely to be only 0.8 per cent, down from 1.1 per cent.

These figures are based on the assumption that the uncertainties stemming from the Iraq war quickly disappear, and that oil prices will average $31 a barrel. But the Fund warned the outlook for the US was also clouded by its current account deficit – now $450bn (£290bn) a year – and a budget deficit that could approach 5 per cent of GDP.

The eurozone however, albeit for different reasons, faces an even more sluggish future. Total 2003 growth for the 12-country bloc is put at just 1.1 per cent, less than half the 2.3 per cent predicted seven months ago.