IMF sees UK economy shrinking amid gloom over global economy

The International Monetary Fund today delivered a damning verdict on Britain's recovery chances as it slashed growth forecasts for this year and next.

The IMF's latest World Economic Outlook (WEO) painted a bleak picture of a deteriorating global economy in the past three months, with the UK and US the "notable" disappointments.

"Indicators of activity and unemployment show increasing and broad-based economic sluggishness in the first half of 2012, and no significant improvement in the third quarter," it warned.

The intervention also heaps pressure on David Cameron on the eve of a crucial Conservative conference speech, in which he will attempt to restore waning faith in the Coalition's economic strategy as the UK endures a double-dip recession.

The IMF's forecasters now predict the UK economy will shrink 0.4 per cent in 2012, after slicing growth estimates by 0.6 percentage points in the past three months – the deepest downward revision among the world's major nations. It has also cut its estimates for UK growth in 2013 to 1.1 per cent, barely half the optimistic-looking 2 per cent currently pencilled in by the Office for Budget Responsibility. It also admitted that spending cuts had had a bigger impact on growth than originally predicted.

The WEO warned: "Five years after the onset of the Great Recession, the recovery remains tepid and bumpy, and prospects remain very uncertain. Unemployment is unacceptably high in most advanced economies, and workers in emerging market and developing economies face a chronic struggle to find formal employment."

The international body warned there could be even worse news to come because its forecasts assume US politicians thrash out a compromise on the so-called "fiscal cliff" – the automatic tax rises and spending cuts which are due to kick in because Democrats and Republicans were unable to agree on deficit reduction measures in 2011. Some analysts warn the cuts could knock $500bn (£310bn) off the world's biggest economy next year.

Failure among eurozone leaders to agree on further integration and common supervision for the eurozone's banks could also hit confidence and send the single currency bloc's economy spinning into a deep recession, the report added.

The IMF estimates this "weak growth scenario" could wipe 1.75 per cent off the eurozone economy, with even steeper economic damage in peripheral southern states, which could shrink as much as 6 per cent.

The impact of the eurozone crisis is also blamed for slowing growth in China, where growth has been hit by tightening credit conditions to cool an overheated property market.

China's state-owned banks are meanwhile boycotting annual meetings of the IMF and World Bank in Tokyo beginning today due to a territorial dispute with Japan, which has inflamed tensions between Asia's two biggest economies. The dispute centres on eight small islands in the East China Sea occupied by Japan but claimed by China and Taiwan, which has led to widescale boycotts of Japanese goods in China.

Mei Xinyu, a researcher for the International Trade and Economic Cooperation Institution, said: "The banks' decision is further evidence that the unilateral actions by Japan is freezing bilateral relations and now starting to weigh on the world's economy."