IMF lowers UK's growth forecast

The International Monetary Fund (IMF) today significantly lowered its UK growth forecast for 2012 to 0.2% and warned the risks from the eurozone debt crisis “continue to loom large”.

Its forecast was reduced from 0.8% just three months ago, reflecting the UK's slide into a double-dip recession in the first quarter of the year and the gloomier outlook for the world economy.

The IMF also lowered its expectations for the UK's growth next year to 1.4%, from 2% previously.

It warned that policymakers need to take further action to get to grips with the eurozone crisis and to help arrest the slowdown in emerging markets, whose potential to contribute to the global economy may have been overestimated.

It said: "Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action."

The IMF stuck with its previous forecast for the eurozone to contract by 0.3% this year despite policymakers having recently taken "steps in the right direction" but warned the situation will remain "precarious".

The IMF called on politicians to build on recent moves to agree to lend money to Spain's banks by making more progress on creating a banking and fiscal union, while urging periphery countries to stay on track with budget reforms.

It said: "The most immediate risk is still that delayed or insufficient policy action will further escalate the euro area crisis.

"The very recent, renewed deterioration of sovereign debt markets underscores that timely implementation of these measures, together with further progress on banking and fiscal union, must be a priority."

Advanced economies saw their forecasts for 2013 lowered to 1.9%, from 2.1% previously, reflecting the eurozone debt crisis, which ratcheted up to levels not seen since the end of 2011.

Meanwhile, growth in emerging markets, such as China, India and Brazil, has slowed and the IMF admitted that previous forecasts may have been "overly optimistic".

It predicts emerging market growth of 5.6% this year, slightly lower than its previous estimate.

The global economy will grow by 3.5% in 2012 and 3.9% the following year, marginally lower than its forecast three month ago.

The IMF slashed its growth forecast for the UK by more than for any other developing country.

TUC general secretary Brendan Barber described the IMF's verdict as "a damning indictment of the Government's economic strategy".

He said: "Last summer the IMF predicted economic growth of 2.3% this year.

"Continuing with the Chancellor's austerity plan is prolonging the depression and risks causing permanent damage to the UK economy, with businesses failing and over a million young people neither in work or training."

A Treasury spokesman said the eurozone crisis was dragging on the UK economy but said a new "funding for lending" scheme would encourage banks to lend to small businesses.

He said: "Because the euro area is the UK's largest trading partner we are now feeling the effect across our economy.

"But as the Chancellor said last week, we are not powerless to act in the face of the European debt storm - that's why the Treasury and the Bank of England are taking co-ordinated action to inject new confidence and support the flow of credit to where it is needed in the real economy."

PA