20 Sep 2011

IMF takes a knife to forecasts for UK growth

The International Monetary Fund has just slashed its forecasts for the British economy as part of a fast deterioration in prospects for the world economy.

The IMF’s World Economic Outlook is an update to figures last released just three months ago. But Britain’s economy is forecast to grow by just 1.1 per cent (an adjustment of -0.5 from June) this year, the slowest of all the advanced economies bar Italy, Spain and tsunami-affected Japan.

If correct the UK economy will have grown more slowly in 2011 than 2010. The IMF’s forecast is well below the 1.7 per cent currently used by the government, and could spell more trouble for the public finances.

The IMF has also taken a knife to its forecast for UK growth in 2012, now predicted at 1.6 per cent rather than 2.3 per cent predicted in June.

The new figures for Britain are broadly in line with, but a little worse than, the IMF’s general downgrade for the world economy. Global growth is predicted at 4 per cent this year and next, which is down from about 4.5 per cent predicted in June.

The reassessment of the United States economy was particularly marked, with almost 1 per cent less growth predicted both this year and next. The US is now forecast to grow 1.5 per cent and 1.8 per cent in 2011 and 2012.

The report blamed a slower than expected private sector recovery, renewed financial sector instability and a higher than expected oil price.

Risks materialising pretty quickly

On page 98 of the IMF WEO an important paragraph for the debate in Britain: “If activity were to undershoot current expectations, countries that face historically low yields should also consider delaying some of their planned adjustment (Germany, United Kingdom),” the report said.

As Chris Giles, economics editor of the FT suggests today this is an incremental step away from the government’s official line on the deficit. It goes beyond merely letting the “automatic stabilisers” work, and suggests an active effort to delay some of the coalition programme if growth disappoints.  The rest of the IMF document suggest that those hypothetical growth risks are now beginning to materialise.

Now the Treasury will be quoting the IMF officials from today’s press conference who confirmed that they should not change plan now. The point is that what was only a contingency a year ago, and a risk three months ago, is now highly plausible. Risks are materialising pretty quickly.

In another part of the WEO  says that the violent stock market movements alone suggest a 17 per cent probability that we are now in a UK recession and a 38 per cent chance of a current US recession.

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