IMF cuts growth forecast for the UK

The Washington-based IMF reported on Monday that UK gross domestic product this year would be 0.2 per cent, down from a projected 0.8 per cent, trailing expectations for France and Germany but leading Spain and Italy. Next year, UK growth is expected to be 1.4 per cent, down from the previous 2 per cent forecast.

IMF head Christine Lagarde (see photo, left) warned Europeans they must enact further measures to deal with the eurozone economic crisis or risk even less optimistic forecasts.

“The global recovery, which was not strong to start with, has shown signs of further weakness,” the IMF said in its biannual global report. “Financial market and sovereign stress in the euro area periphery have ratcheted up, close to end-2011 levels.”

Global growth projections

Global growth increased to 3.6 per cent in the first quarter of 2012, partly due to easing financial conditions and recovering confidence in response to the European Central Bank’s longer-term refinancing operations. Developments during the second quarter were worse, however. Job creation was hampered, with unemployment remaining high in advanced economies, especially among youth in the euro area.

Overall, global growth was projected to be 3.5 per cent in 2012 and 3.9 per cent in 2013, some 0.1 and 0.2 percentage points, respectively, lower than forecast in April 2012. The IMF noted problems in Greece, banking sector problems in Spain, and doubts about the governments’ ability to deliver on fiscal reform and the extent of partner countries’ willingness to help.

Growth is projected to remain relatively weaker than in 2011 in regions connected more closely with the euro area, particularly central and eastern Europe. But growth in the Middle East and north Africa is expected to be stronger in 2012-13 relative to last year, as oil exporters continue to boost oil production.

US fiscal cliff

US data suggested less robust growth than forecast in April. It will be critical for the US to reach transparent, bipartisan agreements to avoid a fiscal cliff in the near term and to raise the federal debt ceiling well ahead of the deadline (which will most likely be early in 2013), the IMF said. At the same time, both the US n and Japan need credible plans to put medium-term government debt on a downward track.

In Japan, a full diet approval – after passage in the lower house – of a gradual increase in the consumption tax rate is essential to maintain confidence in the authorities’ resolve to put public debt on a sustainable trajectory, the IMF said.

Growth momentum has also slowed in various emerging market economies, notably Brazil, China, and India. This partly reflects a weaker external environment, but domestic demand has also decelerated sharply.