IMF warns banks pose risk to UK recovery exposure from banks

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UK banks' exposure to debt-laden countries has left Britain's economic recovery highly vulnerable to shocks in the eurozone, the International Monetary Fund (IMF) warned yesterday. The IMF said banks could be hit by further woes in troubled countries such as Greece, Ireland and Spain – with UK bank loans to these eurozone members accounting for about 14 per cent of gross domestic product.

But the IMF's latest report on the UK also confirmed the economy was "on the mend" and supported the Government's deficit-busting actions. It is forecasting UK growth of 1.7 per cent this year – up from an earlier prediction of 1.2 per cent – and maintained its GDP outlook at 2 per cent in 2011 despite the spending cuts. The IMF also called on the Bank of England to pump more money into the economy through quantitative easing if the recovery stalled enough to impact on inflation.

The Bank's own report on the UK economy, in its quarterly Inflation Report, is due today.

Separately, figures from the Office for National Statistics yesterday showed that growth in manufacturing output slowed to 0.1 per cent in September. While activity rose for the fifth straight month, it was the weakest month-on-month rate since April. The year-on-year increase slowed to 4.8 per cent in September from a near 16-year high of 6.1 per cent in August, which economists said reflected a spike in output last autumn as the manufacturing sector began to pick up after the recession.

The stronger performing manufacturing sub-sectors were chemical and man-made fibres, basic metals and metal products and food, drink and tobacco, while sub-sectors such as electrical and optical equipment, and paper, printing and publishing fell.

Howard Archer, at IHS Global Insight, said: "The reduced rise in manufacturing output in September fuels suspicion that manufacturing activity will be pressurised increasingly over the coming months by stock rebuilding winding down, tighter fiscal policy weighing down on domestic demand, and slower global growth hitting foreign demand."

Other ONS data showed the UK trade deficit – that is when imports exceed exports – narrowed slightly in September. The UK's seasonally adjusted deficit on trade in goods and services was £4.6bn in September, compared with £4.9bn in August.